Major General Peter Wall, British Chief of Staff at Allied Central Command in Qatar, confirmed that it appeared an uprising had taken place, but that it was in its infancy and British troops were "keen to exploit its potential".
According to military intelligence officials, Iraqi troops in the city turned mortar fire on their own civilians in an attempt to crush the unrest.
Journalist Richard Gaisford, who is with the Royal Scots Dragoon Guards just outside Basra, said the British troops are bombarding the mortar positions in an effort to support the uprising.
The main Shia Iraqi opposition group, based in Iran, which claims connections in the city said a revolt was taking place. Baghdad has denied that there has been any unrest in Basra.
Al Lockwood, British military spokesman
"There is more artillery being fired into the city centre of Basra - they are doing that to try to take out Iraqi mortar positions and the mortar positions are firing on the uprisers," Richard Gaisford told the BBC.
"We are being told there is a popular uprising in Basra itself, because of that the armed forces that remain, the Iraqi forces, are firing on those people who are protesting against Saddam Hussein's regime," he added.
He said that the British troops were using a system of radar tracking to pinpoint and then attack the mortar positions.
Coalition planes have dropped two very large bombs on the Baath Party headquarters in the city, which is reported to have been reduced to rubble.
'Shia rebellion'
A spokesman for the British military in Qatar, Al Lockwood, said he had heard reports of the revolt and that Iraqi troops had turned on their own people.
"Open source reporting has it that there was some form of uprising this afternoon against the Baath party. I do understand that the Shia population attempted to attack the ruling party," he said on Sky television.
"The ruling party responded by firing mortars at the crowd that was advancing towards them, our artillery responded to that with shells and mortars.
"We are carefully assessing the situation at the moment and certainly I'm sure that some action will be forthcoming in the morning," Mr Lockwood added.
Iraqi Information Minister Mohammed al-Sahhaf denied that any revolt had taken place.
"The situation is stable. Resistance is continuing and we are teaching them more lessons. This announcement [of an uprising]... stems from a feeling of frustration" on the part of the British, he told Qatar-based al-Jazeera television.
Level of support
The BBC's Tim Franks who is on the Iraq-Kuwait border, says that if reports of the uprising are true, this is what the British forces had hoped for.
Until now, there has been no evidence of any support for British and American forces inside Basra.
Rather, the coalition forces believed that around 1,000 die-hard Saddam Hussein supporters were based in the city and keeping the population in check, our correspondent says.
The United Nations has warned of a potential humanitarian crisis in Iraq's second city, which is home to about 1.5 million people.
Some 100,000 children are at risk of disease as fighting there has continued for four days, disrupting supplies of drinking water, a UN spokesman said.
Aid plans
Engineers from the International Committee of the Red Cross are currently working at the water pumping station with serves the city, and are hoping to restart the plant later on in the day.
Spokesman Florian Westphal told BBC News Online that no more than 40% of the city's population had access to piped water at present, and that the rest were probably taking water direct from the river, where sewage is dumped.
A UK naval ship loaded up in Kuwait with stocks of food, water and other supplies is still waiting to dock in the nearby Iraqi port of Umm Qasr as work continues to clear mines from the sea there.
Securing the port is seen as a crucial stage in ensuring the delivery of humanitarian aid to people in southern Iraq, and particularly in Basra.