BAGHDAD, June 29 (Reuters) - Iraq will spend $100 million to rebuild the east Baghdad slum of Sadr City and create jobs for many of its two million residents after years of violence and neglect, a government official said on Sunday.

The Shi'ite slum is a stronghold of anti-American cleric Moqtada al-Sadr's Mehdi Army, whose fighters clashed with U.S. and government troops there in March and April until a ceasefire halted hostilities.

Sadr City was largely outside the government's control until the truce allowed Iraqi soldiers to deploy.

"The government has ordered an allocation of $100 million to reconstruct and develop Sadr City," Tahseen al-Sheikhli, civilian spokesman for security operations in Baghdad, told a news conference.

He did not give a timeframe for spending the money.

Sheikhli said a tenth of the funds would go toward tackling unemployment. Another $10 million would be used for rebuilding and painting houses destroyed by roadside bombs, rockets or U.S. air strikes during the recent clashes.

A separate $50 million would be spent redeveloping the Baghdad neighbourhood of Shula, another poor Shi'ite district where militiamen claiming allegiance to Sadr have previously held sway.

Hundreds of people were killed in the recent battles in Sadr City. Officials have said they need to improve basic services if they want to consolidate their grip on the slum and prevent militias from regaining the upper hand.

The Mehdi Army and Sadr's political movement gained popular support in poor Shi'ite districts of Baghdad by offering medical care and social services.

Sheikhli said the funds for Sadr City would be spent on a variety of projects, including building two sports stadiums, several schools, health clinics and a blood bank, a dental clinic, markets and parks.

Part of the employment allocation would be spent on loans for small business owners, he said.

Iraqi forces say they have sought to improve Sadr City since calm was restored, installing generators to power houses and cleaning up the area around Jamila market, a wholesale outlet. (Reporting by Ahmed Rasheed; Writing by Tim Cocks; Editing by Caroline Drees)

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