BAGHDAD (Reuters) - U.S. forces opened fire from helicopters during an overnight clash with Shi'ite militants in western Baghdad, killing 10 people and wounding 20, police said on Friday.

They said the wounded included women and children who had been sleeping on rooftops to keep cool, although the dead were believed to be gunmen.

Reuters Television pictures showed cars with their windows blown out after being strafed by gunfire .

Angry mourners, chanting and raising fists, took to the streets in the Shula district of the Iraqi capital, carrying wooden coffins of those killed in the clash.

"We demand the Iraqi government and parliament stop the Americans interfering in Shula," local tribal elder Sabeeh al-Sharji said.

"As you can see, civilians sleep on the roofs. These random attacks terrify women and children."

A spokesman for U.S. forces said they were checking into the incident but could not immediately provide information.

With just weeks to go before U.S. ambassador Ryan Crocker and military commander General David Petraeus are due to report to the U.S. Congress on progress in Iraq, U.S. intelligence agencies released a gloomy forecast of more violence and political stalemate.

"Levels of insurgent and sectarian violence will remain high and the Iraqi government will continue to struggle to achieve national-level political reconciliation and improved governance," declassified findings of the National Intelligence Estimate said.

FUNDAMENTAL SHIFT NEEDED

The report said there had been "measurable but uneven improvements" in Iraqi security since January under the troop increase, but that Prime Minister Nuri al-Maliki's government would become more precarious over the next 6 to 12 months.

"Broadly accepted political compromises required for sustained security, long-term political progress and economic development are unlikely to emerge unless there is a fundamental shift in the factors driving Iraqi political and security developments," it said.

Washington has dispatched an additional 30,000 troops to Iraq this year and pushed them from big bases into neighborhood outposts in an effort to quell sectarian violence in Baghdad and neighboring provinces.

U.S. officials say the strategy has improved security somewhat but have expressed frustration at the failure of Maliki's Shi'ite-led government to pass laws aimed at reconciliation with minority Sunni Arabs.

Sunni Arab insurgents were Washington's main enemy for most of the four years since the 2003 invasion of Iraq, but Shi'ite militias are a growing threat and blamed for roadside bomb attacks that have killed scores of U.S. soldiers.

U.S. forces reported that Shi'ite militias were responsible for 73 percent of attacks on their troops in Baghdad in July.