At least 30 people are dead and 400 wounded in unrest that has gripped Iraq's Green Zone since Shiite cleric Moqtada al-Sadr quit politics.
Mr al-Sadr has called on his followers to withdraw after they stormed the former US military stronghold, now home to Iraqi government offices and foreign embassies.
The influential cleric gave his supporters an hour to leave.
"This is not a revolution," Mr al-Sadr said in a televised address, after several Iraqi officials and the United Nations pleaded for restraint.
The fighting, which began with Mr al-Sadr's shock resignation on Monday, prompted neighbouring Iran to close its land borders to the country, and at least one country has evacuated its embassy.
Earlier on Tuesday, Mr al-Sadr's supporters were seen firing rocket-propelled grenades into the Green Zone.
Iraq's government has been deadlocked since Mr al-Sadr's party won the largest share of seats in October parliamentary elections, but not enough to secure a majority government.
Iraq's Shiite Muslims were oppressed under Saddam Hussein, but the US-led invasion reversed the political order.
Now the Shiites are fighting among themselves, with Iranian-backed Shiites and Iraqi nationalist Shiites are jockeying for power, influence and state resources.
Mr al-Sadr's nationalist rhetoric and reform agenda resonates powerfully with his supporters, who are largely poorer and were historically shut out under Saddam.
Green Zone evacuations
On Tuesday, the Netherlands announced it had evacuated its embassy in the Green Zone.
"There are firefights around the embassy in Baghdad. Our staff are now working at the German embassy elsewhere in the city," Foreign Affairs Minister Wopke Hoekstra said in a tweet.
Dubai's long-haul carrier Emirates has stopped flights to Baghdad.
The carrier said it was "monitoring the situation closely".
It did not say whether flights would resume for Wednesday.
On Monday, protesters loyal to Mr al-Sadr pulled down the cement barriers outside the government palace with ropes and breached the palace gates.
Many rushed into the lavish salons and marbled halls of the palace, a key meeting place for Iraqi heads of state and foreign dignitaries.
Iraq's military announced a nationwide curfew, and the caretaker premier suspended Cabinet sessions.
AP/ABC
