(Updates throughout)

BASRA, Iraq, May 25 (Reuters) - Iraqi special forces killed the leader of Shi'ite cleric Moqtada al-Sadr's Mehdi Army militia in the southern city of Basra on Friday after he tried to resist arrest, the British military said.

Spokesman Major David Gell said Abu Qader and at least one of his companions were shot dead after Iraqi soldiers stopped their car in central Basra, the hub of Iraq's main oilfields.

Sadrists identified the dead Mehdi Army leader as Wissam Abdul Qader.

The killing came on a day when Sadr made his first public appearance in months, portraying himself as a nationalist leader committed to the political process. He called on his militia to stop attacks on Iraqi security forces.

Gell stressed the operation had been authorised by the Iraqi government. There was no immediate comment from Iraqi officials.

A senior member of Sadr's political movement said their response would be limited to "political resistance". Gell said British forces were braced for any violent backlash.

He described Abu Qader as the leader of the Mehdi Army in Basra and said he was suspected of involvement in planting roadside bombs, weapons trafficking, assassinations and planning and participating in attacks against British troops.

He said the operation had been Iraqi-led with British troops acting as advisers.

"During the arrest operation the targeted individual was killed ... after he resisted arrest," he said.

As British troops withdrew from the area, they came under rocket-propelled grenade and small arms fire. They returned fire, hitting at least seven gunmen. It was not clear whether they were wounded or dead, Gell said. One British soldier was slightly wounded.

The senior member in Sadr's movement said the militant leader had just left Friday prayers when British forces ambushed and killed him along with two other Mehdi Army members.

British troops have stepped up operations against Shi'ite militias in the city in recent weeks as they prepare to hand it over to Iraqi security forces. April was the deadliest month for British troops there since the first month of the Iraq war.

Britain is preparing to reduce its 7,000-strong force in Basra to about 5,500 within the next few weeks.

Analysts say militias are increasing their attacks so that they can claim victory when British forces eventually pull out. British bases are struck almost daily by mortar fire and patrols hit by roadside bombs and machinegun fire.

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