Local police charge that American troops deliberately shot 11 civilians, including four women and five children, in an attack on a house, and then called in air support to bomb the building.
U.S. Maj. Gen. William Caldwell IV, the chief military spokesman, denied the claims.
"Allegations that the troops executed a family living in a safe house," he said, "and then hid the alleged crimes by directing an air strike, are absolutely false."
But that doesn't wash with one local man on the street.
"The American soldiers didn't kill insurgents," the man said through a translator. "They killed children. Do you really think these children were carrying guns?"
Today, the Iraqi prime minister's office rejected the military report that exonerated American troops in Ishaqi, saying it was unfair. The Iraqi government will demand an apology and compensation.
Earlier in the week, the prime minister said he was losing patience with the accidental killing of unarmed civilians by U.S. troops, saying, "There is a limit to mistakes."
Nearly 2,500 American soldiers have been killed in Iraq in the past three years. With the daily threat of insurgent bombs, the troops are on edge for a reason.
But Iraqis say they are terrified by U.S. troops on patrol or at checkpoints, who can open fire if they believe they are "under threat." According to one police estimate, an innocent Iraqi civilian is killed by coalition forces every two days.
"If you want to see their terrorism, you don't have to go to Haditha," said one man, named Jabur. "Just go out on the street. If you drive too close to them you can get killed."
ABC News' John Yang at the Pentagon and Hillary Brown in Baghdad reported this story for "World News Tonight."