IRAQ WRAPUP 2-Iraq takes step closer to landmark oil law

BAGHDAD, July 3 (Reuters) Iraq's cabinet approved changes to a draft oil law today, taking a big step towards meeting a key political target for national reconciliation set by the United States.

Washington wants Iraq's leaders to speed up passage of the oil law and other legislation it believes is crucial to reducing violence between majority Shi'ites and minority Sunni Arabs.

''The law was approved unanimously (by the cabinet) ... it was referred to the parliament which will discuss it tomorrow,'' Shi'ite Prime Minister Nuri al-Maliki told a press conference.

In the latest violence, US forces killed 23 militants suspected of links with al Qaeda during a fierce battle in the western Anbar province over the weekend, the military said.

US and Iraqi forces, backed by war planes and helicopters, confronted a large group of militants as they were preparing to launch a series of suicide bomb attacks in the Anbar capital Ramadi, 110 km (70 miles) west of Baghdad, the military said.

''Coalition and Iraqi security forces received reports that a significant number of anti-Iraqi forces had gathered on the outskirts of Ramadi to stage a series of large-scale attacks,'' the military said in a statement.

''The group, affiliated with al Qaeda in Iraq, intended to regain a base of operations in Al Anbar with suicide car and vest bomb attacks.'' Anbar was once the heart of the Sunni Arab insurgency and the most dangerous region for American soldiers in Iraq.

But Sunni Arab tribes began to turn against Sunni Islamist al Qaeda last year, angered by the group's indiscriminate killing of civilians and harsh interpretation of Islam.

The US military has described its cooperation with the Sunni Arab tribes in Anbar to drive al Qaeda militants out as one of the biggest success stories in Iraq in recent months.

The US military also said was reviewing an F-16 air strike on insurgent targets in the southern city of Diwaniya after local officials said 10 civilians were killed in the attack. A hospital source said six children were among the dead.

OIL LAW The draft hydrocarbon law is vital to regulating how wealth from Iraq's huge reserves will be shared by its sectarian and ethnic groups and to attracting foreign investment to revive the country's only real economic asset.

It was originally approved by the cabinet in February but faced stiff opposition from the government in the autonomous region of Kurdistan, which felt it was getting a bad deal.

Most of the oil is in the Kurdish north and Shi'ite south.

The hydrocarbon law, which could unlock Iraq's huge oil wealth, is seen as the most important of the political benchmarks for placating disaffected Sunni Arabs who were dominant under Saddam Hussein.

Laws also need to be passed that set provincial elections by the end of the year and that allow some members of Saddam's Baath party to return to government and the military.

Maliki told the press conference that these would be discussed by his cabinet next week and should be approved soon.

US President George W Bush has dispatched 28,000 extra troops to Iraq under a security clampdown that was launched in February, and is growing pressure at home to show results.

The security push is partly designed to win breathing space for Shi'ite Prime Minister Nuri al-Maliki to press ahead with national reconciliation.

The air strikes in Diwaniya were ordered after insurgents fired some 75 mortar bombs and rockets at a coalition military base in the city before dawn on Monday, the US military said in a statement. Three soldiers were wounded.

It said the engagement was being reviewed to determine whether ''appropriate and proportionate force'' was used.

A spokesman for the Polish military, which has 900 soldiers in the area, said nine people were killed.

REUTERS GT VV1826