Iraqi nationalist cleric Moqtada al-Sadr and Iranian-backed militia chief Hadi al-Ameri were set to lead talks on Wednesday to form a government in Baghdad after announcing an alliance of their political blocs.
Sadr and Ameri's groupings won first and second place respectively in May's election, which has been beset by allegations of fraud and raised fears of bloodshed among Shia paramilitary groups.
They announced the alliance in the Shia holy city of Najaf, an apparent attempt to project unity among leaders of the Muslim sect that has dominated since the fall of Saddam Hussein.
A week ago, am explosion killed at least 18 people and wounded more than 90 in Sadr's Baghdad stronghold of Sadr City district, in what the interior ministry called "a terrorist aggression on civilians".
State television reported on Wednesday that the Supreme Judicial Council had issued arrest warrants for 20 people in connection with the blast.
The Sadr-Ameri pact could ease fears of violence, which some have said could even spiral into intra-Shia civil war.
Ameri, widely described as Tehran's man in Iraq, is one of the most powerful figures in the country.
Iraq, a key ally of the United States and major oil producer, has 150,000 heavily armed mostly Shia paramilitary fighters operating alongside state forces - some of them more loyal to their commanders and Iran than to the Iraqi state.
Both Sadr and Iran seem to be taking a pragmatic approach as Iran seeks to maintain its deep influence in its most important Arab ally at a time when its wider Middle East interests are under threat.
Not only has U.S. President Donald Trump pulled out of a global nuclear deal with Tehran and then embraced North Korea, increasing Iran's isolation; Tehran's allies in Yemen are also facing a major offensive from a Saudi-led coalition that could mark a turning point in the war.
Sadr, who led violent campaigns against the U.S. occupation that ended in 2011, has emerged as a nationalist opponent of powerful Shia parties allied with neighbouring Iran, and as a champion of the poor.
Tehran has skilfully manipulated Iraqi politics in the past, and the cleric has to tread carefully.
But Sadr, who derives much of his legitimacy from his revered father, Grand Ayatollah Muhammad Sadiq Sadr, assassinated in 1999 by Saddam's agents, is a formidable and unpredictable operator.
He also has street power, with a track record of mobilising tens of thousands of supporters to protest against opponents and government policies.
In the 2010 election, Vice President Ayad Allawi’s group won the largest number of seats, albeit with a narrow margin, but he was prevented from becoming prime minister.
He blamed Tehran, which manoeuvred Nuri al-Maliki into power, and Sadr helped to form a national unity government.
During the American occupation, Tehran was accused of arming Sadr's Mehdi Army militia with sophisticated bombs used in attacks on U.S.-led coalition forces.
Tehran has accommodated him in the past; he went into self-imposed exile in Iran in 2007.