"The Sadr group will not take part in the (provincial) elections as we did in the parliamentary election," said Sheikh Salah al-Obeidi, a spokesman for Sadr in the holy city of Najaf.
"This is the decison as of now by Moqtada and the Sadrists. We want to avoid making the same mistakes of being part of the sectarian divisions."
Iraq is due to hold elections in its 18 provinces on October 1, a key benchmark set by Washington to stabilise the war-torn country by giving more power to local provincial councils, especially for economic projects.
The Sadr group has 32 lawmakers in the 275-member parliament and its latest decision not to take part in the elections is seen as a step to consolidate its image as a nationalist and anti-American movement.
Obeidi said the group will not directly participate in the elections but will support "independent" candidates.
Amid sectarian concerns, Iraq's own presidency had initially objected to a contested provincial elections law passed in February on the grounds that some aspects of the legislation were in contradiction with the Iraqi constitution.
The latest strategic decision by Sadr, who is believed to be in Iran, comes two days after he decided to reform his feared Mahdi Army militia.
On Friday, Sadr said that he plans to form a new wing of his powerful movement especially to battle US forces, allowing other members to focus on social issues.
In a statement issued to his nearly 60,000-strong Mahdi Army militia, he said the fight against US troops will now be waged only by the new group, while other members will "take on a social and religious role."
"We will keep resisting the occupier until the liberation (of Iraq) or (our) martyrdom," he said on Friday.
Sadr also urged others in his militia to lay down their arms to work on building social, cultural and religious services in Iraq's dominant Shiite community.
The decision not to participate in the elections also comes ahead of a planned assault by Iraqi and US forces on Shiite fighters in the southern province of Maysan next week.
On Saturday, Prime Minister Nuri al-Maliki gave a four-day deadline to Shiite militiamen to lay down their arms before the military crackdown begins on June 19 in Maysan and primarily in Amara, the provincial capital.
The Sadr group believes the crackdown could target its members as it did when Maliki had launched a similar assault in the main southern city of Basra in March that killed hundreds of people.
"We have big fears that this campaign could be directed against Sadrists," Obeidi said. We do not want Basra events to be repeated in Amara."
He reiterated that the Sadr group was ready to work with the government to avoid casualties in Maysan.
Since Saturday, Iraqi and US forces have poured into Amara and urged civilians to stay indoors.
