By Michael Georgy

NAJAF, Iraq, Nov 20 (Reuters) - American plans for a faster handover of power to Iraqis are generating talk of holy war, not self-rule, in the country's majority Shi'ite heartland.

In a major policy shift, Washington has dropped its insistence that the writing of a constitution and elections must precede the transfer of power to Iraqis. Instead, a transitional government will take over sovereignty in June, though U.S.-led forces are expected to stay on after the handover.

Few in Najaf, a city crucial to the stability of postwar Iraq, believe the American promises. Many see the change of tack as a ruse to prolong the occupation, raising concerns that Iraq's hitherto restrained Shi'ites are losing patience.

"The Americans will never leave Iraq. We have to act. Jihad is the only way to get them out," said Hussein Ali, a labourer in the city, which is home to one of Shi'ite Islam's holiest sites. "All their talk of giving us power is lies."

Iraq's downtrodden Shi'ites, who make up 60 percent of the population, hoped for a bright future after a U.S.-led invasion ended decades of repression, torture and executions under Saddam Hussein's Sunni-dominated government in April.

"After years of suffering, of being killed and buried in mass graves we deserve to have our sovereignty. That won't happen because there are lots of American lies," said trader Muhammad Hassan, 60.

"If they don't leave soon we will need to resort to force, to jihad (holy war) to get them out."

U.S.-led forces suffer casualties almost every day in Iraq, though most of the resistance is concentrated in Sunni areas.

But Shiite frustrations have been growing against the backdrop of a power struggle between top moderate clerics led by Ayatollah Ali Sistani and Moqtada al-Sadr, a radical sheikh gaining popularity with his defiance of the occupation.

"The Americans have all kinds of excuses for staying, like searching for weapons of mass destruction and finding Saddam," Sheikh Adnan Shaaman, a spokesman for Sadr, told Reuters.

"We will see how long they will stay after these goals are accomplished."

PAST LEADERS

Under the new American plan, caucuses in each of Iraq's 18 provinces will select a national assembly in a population-weighted vote. That assembly will pick the transitional government, which will replace the U.S.-led Coalition Provisional Authority.

But Iraqis in Najaf, a city with huge influence among Shi'ites across the country, are not contemplating the prospect of politicians representing them, a sign of the scepticism about the U.S. transition plans.

Many in Najaf look up instead to past spiritual leaders, elderly men with white beards, believed to have been killed by Saddam's intelligence agents.

A vendor selling posters of these clerics said sales were strong these days.

"I am selling a lot. I hope that one day we can choose new leaders," said Amaar Hyder.

At a nearby market, money dealers exchange Iraqi dinars and women in black shawls discreetly buy lingerie in the conservative city. Business is healthy but the outlook on politics is grim.

People want the Americans to leave but some fear a quick exit would unleash civil war in a country with a volatile mix of Shi'ites, Sunnis and Kurds with old scores to settle.

"This may not be the time to leave. The country has to be stabilised first," said unemployed Jawwad Jassim. "But I really don't think we have any future. We are finished."