Two protesters were killed and Iraq declared a nationwide curfew after supporters of Moqtada Sadr stormed the government palace in Baghdad's Green Zone Monday following the powerful Shiite leader's declaration that he was quitting politics.

Shots were fired in the fortified area which houses government buildings as well as diplomatic missions, an AFP correspondent said, as tensions soared amid an escalating political crisis that has left Iraq without a new government, prime minister or president for months.

The army announced a nationwide curfew from 7:00 pm (1600 GMT), after earlier declaring a Baghdad curfew that demonstrators ignored.

Medics told AFP that two Sadr supporters were killed and 22 others wounded after clashes broke out in the Green Zone.

Witnesses said Sadr loyalists and supporters of a rival Shiite bloc, the pro-Iran Coordination Framework, were exchanging fire.

Security forces also fired tear gas to disperse the Sadrists at the entrance to the Green Zone, a security source told AFP.

Calling the developments "an extremely dangerous escalation", the United Nations Assistance Mission in Iraq (UNAMI) urged "protesters to immediately leave" the area.

It urged "all" to "refrain from acts that could lead to an unstoppable chain of events".

"The very survival of the state is at stake," it said.

- 'Definitive retirement' -

Iraq has been mired in political deadlock since legislative elections in October last year, due to disagreement between Shiite factions over forming a coalition.

Shortly after he made his surprise declaration, Sadr's followers entered the Republican Palace, where cabinet meetings are usually held.

Inside the opulent palace, protesters lounged in armchairs in a meeting room, as some waved Iraqi flags and took photographs of themselves, while others cooled off in a swimming pool in the garden, an AFP photographer said.

Sadr -- a grey-bearded preacher with millions of devoted followers, who once led a militia against American and Iraqi government forces -- announced earlier on Monday on Twitter he was stepping back from politics.

"I've decided not to meddle in political affairs. I therefore announce now my definitive retirement," said Sadr, a longtime player in the war-torn country's political scene, though he himself has never directly been in government.

He added that "all the institutions" linked to his Sadrist movement will be closed, except the mausoleum of his father, assassinated in 1999, and other heritage facilities.

His latest statement came two days after he said "all parties" including his own should give up government positions in order to help resolve the months-long political crisis.

His bloc emerged from last year's election as the biggest, with 73 seats, but short of a majority. In June, his lawmakers quit in a bid to break the logjam, which led to the Coordination Framework becoming the largest bloc in the legislature.

Since then, Sadr has engaged in other pressure tactics, including a mass prayer by tens of thousands of his followers on August 5.

Hamzeh Hadad, from the European Council on Foreign Relations (ECFR), said it was "not clear" what Sadr's strategy was.

"Whatever it does mean, in typical Sadrist fashion, there is always backtracking expected," Hadad said.

"The second, and more terrifying thought on this is that he is giving his followers the green light to do whatever they like, and he will say he is no longer responsible for them."

- Millions of followers -

Sadr's supporters have been calling for parliament to be dissolved and for new elections, but on Saturday the cleric said it was "more important" that "all parties and figures who have been part of the political process" since the 2003 US-led invasion "no longer participate".

"That includes the Sadrist movement," he said, adding that he was willing to sign an agreement to that effect "within 72 hours".

Over the years, the chameleon-like Sadr has taken various positions and then reversed them.

Sadr's supporters have for weeks been staging a sit-in outside Iraq's parliament, after storming the legislature's interior on July 30, to press their demands.

They were angered after the Coordination Framework nominated a candidate they saw as unacceptable for prime minister.

The Framework wants a new head of government to be appointed before any new polls are held.

Caretaker Prime Minister Mustafa al-Kadhemi earlier this month convened crisis talks with party leaders, but the Sadrists boycotted.

Many Iraqis say the political infighting has nothing to do with their day-to-day struggles.

Iraq has been ravaged by decades of conflict and endemic corruption.

Oil-rich but blighted by ailing infrastructure, unemployment, power cuts and crumbling public services, Iraq now also faces water shortages as drought ravages swathes of the country.