By Suadad al-Salhy and Isabel Coles
TUZ KHURMATO, Iraq (Reuters) - A hundred miles from Baghdad, tanks are facing off across a frontline defined not by an international border but by ethnic enmity, fueled by past bloodshed and future oil wealth, that risks tearing Iraq apart.
The sun-blazoned flag of Kurdistan flies from the turrets of Soviet-built armored vehicles, seized a decade ago from Saddam Hussein's army, their barrels now aimed at the unseen forces of Iraq's national government on the far side of Tuz Khurmato, a town beyond the formal boundary of the Kurds' autonomous region.
For three weeks, Kurdish "peshmerga" and soldiers of Baghdad's Arab army, have been reinforcing positions in the "disputed territories", a long, ill-defined swathe of northern Iraq, rich in oil and communal complexity, where the federal government and Kurdish leaders based in Arbil vie for control.
For all the flag-waving and warnings of war from Iraqi Prime Minister Nuri al-Maliki and Kurdistan President Masoud Barzani, few believe either will risk an all-out conflict whose outcome would be uncertain and would disrupt both a flourishing economy in Kurdistan and oil exports that bring Baghdad vital revenues.
Rather, both are gaining from this, the second such flare-up in the year since U.S. troops quit Iraq, to consolidate their respective support among Arabs and Kurds for upcoming elections.
Maliki spoke this week of "unpredictable risks" as Kurdish troops brought up more tanks and artillery close to the oilfield city of Kirkuk: "If it erupts ... it will be a painful, shameful ethnic conflict," he said, warning of "dangerous dimensions".
Kurds accuse the Iraqi premier of "opening a Pandora's box".
U.S. forces, whose no-fly zone first gave the Kurds de facto autonomy from Saddam in 1991, helped keep a peace between them and the Arabs after occupying Iraq in 2003; now, Washington's diplomats have had to work behind the scenes to calm tempers, most recently following a shootout on November 16 between Iraqi and Kurdish forces in Tuz Khurmato in which a bystander was killed.
Politicians, diplomats and analysts detect an unwillingness on either side to go beyond verbal skirmishing or the sort of occasional, tit-for-tat halts in transfer payments or oil pipelines that have long marked their fractious relationship.
"Both Baghdad and Arbil seem not to be willing to push this," said Gareth Stansfield, a former U.N. adviser on the dispute who teaches Middle East politics at Exeter University.
At the same time, neither side is in a hurry to pull back.
"There is definitely a sense this might not cause outright war, but flashpoints all over in all sorts of places," one diplomat said. "This is probably going to be quite prolonged, because there isn't much appetite to settle it."
Stansfield added: "Every episode like this makes the relationship between Arbil and Baghdad, Barzani and Maliki, even worse - which is, of course, a problem for the future."
Ten years after the U.S. invasion toppled Saddam in the name of democracy, the stand-off demonstrates Iraq's failure to forge consensus among Maliki's Shi'ite Muslim majority, Sunni Arabs who were dominant under Saddam, and the Kurds, some 15 percent of the population, concentrated in the northern mountains.
Most violence has been seen in a sectarian war among Arabs; Maliki has had support from the Kurds, who have not pressed for full statehood, aware of their landlocked isolation and the hostility of neighbors wary of their own Kurdish minorities.
Yet Iraqi Kurdish expansion beyond a regional frontier noted in the 2005 constitution - and new Kurdish contracts to sell oil to foreign firms without reference to Baghdad - may push Iraq's divided Arabs to close ranks; united Arab hostility may in turn also help stifle friction among competing Kurdish movements.
"The sectarian card is not working anymore and the nationalist card is the joker now," said a Shi'ite member of the Iraqi parliament who has himself previously allied with Sunnis, in describing a coming realignment of forces among the Arabs.
One Sunni tribal leader in Salahaddin province, which includes Tuz Khurmato but also Tikrit, Saddam's home town, said former army officers he knew had not only removed portraits of the executed dictator from their walls recently but even put up pictures of Maliki. That would once have been unimaginable among Sunni Arabs who have long seen the premier as a pawn of Shi'ite Iran. It says much about new perceptions of a Kurdish threat.
For his part, Maliki, despite pursuing Iraq's fugitive Sunni vice president over sectarian attacks, is courting Sunni allies after seeing some Kurdish lawmakers who helped keep him in power after the 2010 election support a parliamentary motion to unseat him. Provincial elections in the new year may offer clues to potential partners before the March 2014 parliamentary ballot.
"Maliki is waiting for a strong Sunni ally, to get a parliamentary majority and then to form the majority government next time," one ally of the prime minister said privately.
SHADOW OF HALABJA
For the Kurds, Maliki's move to set up a new command structure for those national security forces based on their doorstep - known as the Tigris Operations Command - violates the constitution and reveals a drive by Baghdad to thwart their hopes of annexing Kirkuk and other areas where, since 2003, they have been expanding their own military and political presence.
Accusing the head of the new command centre of a role in Saddam's genocidal assaults on the Kurds in the 1980s - a charge he denies - Kurdish leaders have lined up together against Maliki after falling out among themselves earlier this year over tactics in the parliament and over the civil war in Syria.
Barzani, leader of the Kurdistan Democratic Party (KDP), and Jalal Talabani of the Patriotic Union of Kurdistan (PUK), who is Iraq's president in the power-sharing national administration, have buried differences to demand Maliki disband the new command whose troops are now confronting the peshmerga at Tuz Khurmato.
"Maliki is opening a Pandora's box," said one senior Kurdish politician, who spoke anonymously due to the sensitivity of the current situation. "Kirkuk for us is everything, not a game for political gains or any other kind. It is about justice to our cause and undoing what Saddam and other Iraqi regimes did."
In a joint statement on November 22, the Kurdish parties invoked memories of the poison gas massacre of Kurds at Halabja in 1988 to warn that Baghdad might repeat such "chauvinist attacks".
"Whenever an external threat exists against Kurdish issues, we are unified," said Omar Badi of the Islamic Union of Kurdistan, which sits in the regional assembly in opposition to the governing coalition of KDP and PUK. "Whoever confronts the threat from outside will win the votes of the Kurdish people."
A Shi'ite politician in Baghdad said one significant change had been in the role of Talabani, who had used his position as head of state to mediate between Maliki and Barzani - against whom Talabani fought a civil war in Kurdistan in the 1990s.
"Talabani has lost his strategic Shi'ite alliances and his position as a friend and father of all factions," the Shi'ite political figure said, speaking privately. "He can no longer play the role of intermediary between the rivals."
For now, that phoney war continues, around Tuz Khurmato, to the southeast of it in Diyala province, in the northwest around the big city of Mosul and, most intensely, around Kirkuk.
For years, it has been a conflict fought in near silence, with intimidation and only sporadic violence used to drive out rival groups and alter the ethnic mix of local communities that are supposed, one day, to vote in a referendum on whether parts of the disputed territories should join the Kurdistan region.
Kurds are keen to reverse Saddam's policy of resettling the area with Arabs, including many Shi'ites from the south. Arabs accuse Kurds of rewriting history. Other substantial groups, notably Turkish-speaking Turkmen, are also pressing claims.
Stalemate over holding the plebiscite that the constitution stated should have been held by 2007, has left Baghdad and Arbil increasingly arguing along the barrels of their tanks.
(Editing by Patrick Markey and Alastair Macdonald)