An unknown number of people were injured in the melee at the shrine of Imam Ali, one of the holiest sites of Shiite Islam, practiced by the majority of Iraqis.
"People attacked and killed both of them inside the mosque," said Ali Assayid Haider, a mullah who traveled from the southern city of Basra for the meeting in Najaf.
CBS News could not independently confirm the reports.
Witnesses told reporters that a meeting was being held among leading mullahs about how to control the shrine, which had been under the control of the hated Haider al-Kadar, of Saddam's Ministry of religion.
In a gesture of reconciliation, al-Kadar was accompanied to the shrine by Abdul Majid al-Khoei, a high-ranking Shiite cleric and son of one of the religion's most prominent ayatollahs, or spiritual leaders. He had just returned a week ago from exile in London to help restore order after the city was liberated by U.S. troops.
When the two men appeared at the shrine, members of another faction loyal to a different mullah, Mohammed Baqer al-Sadr, verbally assailed al-Kadar.
"Al-Kadar was an animal," said Adil Adnan al-Moussawi, 25, who witnessed the confrontation.
Apparently feeling threatened, al-Khoei pulled a gun and fired one or two shots. There were conflicting accounts over whether he fired the bullets into the air, or in the crowd.
Both men were then rushed by the crowd and hacked to death with swords and knives, the witnesses said.
Al-Khoei was among the prominent returned exiles. Arriving in Najaf April 3, he said local clerics were attempting to negotiate a deal whereby Iraqi loyalists would leave the mosque in return for safe passage out of the city. Al-Khoei headed a London-based philanthropic group.
"He has been trying to get the Sunnis and the Shia together over the years," said Iraqi journalist Hamid Ali Alkifaey to Sky Television.
"Majid al-Khoei has been very active in politics. He has supported the allies and the military action against Saddam Hussein," said Alkifaey, "but his brother was assassinated back in 1994 in Najaf, and his brother was not involved in politics at all."
Al-Khoei's father, Ayatollah Abul-Qassim al-Khoei, was the revered Shiite spiritual leader at the time of the 1991 Shiite uprising crushed by Saddam. He died in 1993, two years after he was forced to meet Saddam to prove loyalty. The meeting was televised by Iraqi TV in a gesture to humiliate the Shiites.
Al-Khoei told The Associated Press recently that he has urged his followers in the Shiite cities to stay at home and let the U.S. troops do their job. He said Saddam's tactics of urban warfare and the use of paramilitary militias made it highly risky for the population to revolt.
A tearful Ghanem Jawad at the Khoei foundation in London confirmed that al-Khoei had been attacked, but didn't know if he'd been killed.
He accused a group of "followers of the regime" of attacking the men.
Al-Khoei had lived in London since he defected after the 1991 Shiite uprising.
He returned to Najaf last week, shortly after it was liberated by U.S. troops.
"It is difficult now to convince people that the Americans mean business and they want to get rid of Saddam," al-Khoei told the AP from London in March 26.
After his arrival in Najaf, he told the AP by telephone that he and a group of exiled Iraqis have helped persuade locals in Najaf to cooperate with U.S. troops.
"I think Majid al-Khoei has been personally targeted by Saddam Hussein's regime because of his opposition to the regime and because of his influence," said Alkifaey. "Saddam has targeted Iraqi Shia clerics. He has assassinated some of them and others were executed."
Najaf is the seat of the Shiites' spiritual leaders, known as ayatollahs, and the center for scientific, literary and theological studies for the Islamic world.
For the world's nearly 120 million Shiites, Najaf is the third holiest city, behind Mecca and Medina in Saudi Arabia.