BAGHDAD, (Reuters) – Hours of clashes between Iraqi security forces and Sunni Arab neighbourhood guards killed three people and wounded eight in Baghdad on Saturday, a medical source in a nearby hospital said.

Baghdad security spokesman Qassim al-Moussawi said the firefight with the Sunni Arab fighters, who were sponsored by the U.S. military to fight al Qaeda, broke out after Iraqi forces arrested Adil al-Mashhadani and one of his men on charges of terrorism in al-Fadhil, central Baghdad.

The hospital source said he had received three bodies — two civilians and a policeman — and treated eight wounded civilians.

A Reuters reporter heard heavy gunfire near the scene and saw Iraqi army snipers on roofs all around the neighbourhood. He said Iraqi forces had ringed the neighbourhood, but its streets were largely controlled by the Sunni Arab fighters. “Iraqi forces arrested al Mashhadani because they had a judicial warrant. The clashes started because of this,” Moussawi said. He did not have reports of casualties.

Called Awakening Councils or “Sahwa” in Arabic, the units are led mostly by Sunni Arab tribal sheikhs and comprise many former insurgents. They have been credited with drastically cutting violence, routing Sunni Islamist al Qaeda from parts of Baghdad, western Anbar province and some northern towns. There are around 100,000 members nationwide, who were paid by the U.S. military, but last year the Iraqi government started taking over the programme. It will soon pay all of them itself, until it absorbs 20 percent into its own security services and finds civilian jobs for the rest. How the Shi’ite-led government handles the Sunni Arab fighters it once fought is seen as a major test of reconciliation as the United States prepares to pull its combat troops out of Iraq by Aug. 31, 2010.

Many former insurgents in the programme have feared being arrested or pursued in sectarian vendettas, despite assurances by Prime Minister Nuri al-Maliki that this would not happen.

U.S. officials have said a dangerous situation could ensue if Maliki’s government fails to reconcile with these Sunni Arab fighters, although they say Iraq has the right to detain those accused of grave charges, such as murder or terrorism.