Sheik Salah al-Obeidi, an aide to anti-American cleric Muqtada al-Sadr, said the cease-fire will go into effect Sunday.
The cease-fire may not necessarily end seven-week-old clashes in Sadr City, the stronghold of al-Sadr's Mahdi Army. The U.S. military has blamed clashes on groups who broke away from the main organization. It remained unclear who will abide by the cease-fire deal.
It is not believed that the bulk of the 60,000-string Mahdi Army has participated in the clashes, but mostly just splinter groups that have refused to honor a general cease-fire ordered by al-Sadr last August. Al-Sadr has directed his supporters to only fight when attacked.
There was no immediate comment from the U.S. military on the reported deal. Iraqi government spokesman Ali al-Dabbagh refused repeated requests for comment.
"Government security forces have the right to pursue wanted people legally with respect to the principles of human rights and anyone from police and other security forces who violates this will be sued according to the law," al-Obeidi said
The newly announced cease-fire comes after government-backed Shiite envoys set strict demands for Shiite militias to end their battles against U.S.-led forces in a meeting with al-Sadr's supporters on Thursday.
Al-Obeidi said an agreement had been reached between the governing United Iraqi Alliance and the Sadrists.
"A 10-point agreement has been reached between members from the United Iraqi Alliance and Sadrist movement in Baghdad and we are informed that Prime Minister Nouri al-Maliki is committed to it," al-Obeidi said in the southern city of Najaf.
He said "the agreement stipulates that Mahdi Army will stop fighting in Sadr City and will stop displaying arms in public. In return, the government will stop random raids against al-Sadr followers and open all closed roads that lead to Sadr City."
Al-Obeidi said a joint committee will observe the implementation of the agreement and any violations by either side.
"This document does not call for disbanding al-Mahdi Army or laying down their arms," al-Obeidi said, rejecting a previous call by al-Maliki.