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BAGHDAD, Feb 2 (Reuters) - Iraq's worst political crisis in a year eased slightly as the Sunni-backed Iraqiya bloc this week ended a parliamentary boycott but tensions remained high as Baghdad's worries grew over relations with neighbours Iran and Turkey.
The end of the boycott did little to signal the end of rifts between the fractious members of Shi'ite Prime Minister Nuri al-Maliki's coalition government, and Maliki's actions did nothing to ease Sunni concerns he is trying to consolidate power.
The Iraqi leader's relations with Turkey, a key investment partner, have grown testy and Baghdad has expressed concern about Iran's threat to close the Strait of Hormuz, which could strangle the movement of Iraqi oil to world markets at a moment when it expects to step up exports sharply.
The political machinations have unfolded against a backdrop of increased violence as Iraq's still-lethal insurgency stepped into the void with some of its biggest attacks in a year, calling into question the readiness of Iraqi security forces after the departure of the last U.S. troops in mid-December.
The Maliki government's move to arrest Sunni Vice President Tareq al-Hashemi, coupled with Maliki's request to parliament to fire Deputy Prime Minister Saleh al-Mutlaq, another prominent Sunni, triggered the political crisis and raised fears of renewed sectarian violence.
Hashemi fled to the semi-autonomous northern Kurdish region to avoid arrest, further raising tensions between the Kurds and the central government, which already have longstanding disputes over oil, land and constitutional rights.
The political crisis and a Kurdish oil exploration deal with oil giant Exxon Mobil could push disputes between Baghdad and the Kurds to new heights, increasing anxiety in Iraq's disputed territories, already a potential faultline for conflict without U.S. troops to act as a buffer.
While violence has fallen since the worst days of sectarian conflict, bombings, assassinations and other attacks by Sunni Islamist insurgents and Shi'ite militias still occur daily and scores of people are killed every month.
The now-completed U.S. military withdrawal - nearly nine years after the invasion that toppled Saddam - could allow a worsening of sectarian differences and meddling by neighbours, including Shi'ite Iran and Sunni Saudi Arabia.
A return to sectarian bloodletting in Iraq could embarrass U.S. President Barack Obama as his campaign for re-election in November swings into high gear.
Multi-billion dollar deals with energy majors could quadruple oil output capacity in six years and power Iraq into the big league, but they are moving ahead only slowly.
Increased production would give the OPEC member the money it needs to rebuild but everything depends on whether it can secure oilfields, refineries and other vital infrastructure.
Iraq is isolated from world markets. Only a few dozen firms are listed on the stock exchange. The dinar is thinly traded and the exchange rate is effectively determined by the central bank in its dollar auctions.
Below are some of the major risks facing Iraq.
While Sunni-backed Iraqiya's return to parliament may have been more about saving face and jobs than any real easing of tensions with the Shi'ite-led government, the move was welcomed by the political blocs and foreign interests as a step toward resolving the crisis.
The inclusion of Iraqiya in a 2010 power-sharing deal was considered a key to pacifying Sunnis who have felt marginalised in politics since the 2003 invasion that toppled Sunni dictator Saddam Hussein and allowed majority Shi'ites to take power.
But Shi'ite premier Maliki has not backed away from moves against the two Sunni leaders; Hashemi, accused of running death squads, and Mutlaq, who accused Maliki of being a dictator.
Without U.S. troops on hand, some analysts say Maliki seems intent on provoking Iraqiya and consolidating his control over Iraq, which has the world's fourth largest oil reserves.
Several mainly Sunni provinces have moved for more autonomy from Baghdad, complaining they are being ignored by the Shi'ite-dominated government.
Washington displayed its alarm over the political crisis when Secretary of State Hillary Clinton warned Iraq not to "blow this opportunity" to become a prosperous, unified nation.
But New York-based Human Rights Watch said the United States had left behind a "budding police state" where the government suppresses freedom of expression and tortures prisoners, despite Washington's assurances it had helped create a stable democracy.
- Efforts by U.S., neighbours to cool tensions
- Further attempts by Maliki to isolate Iraqiya
Maliki and Turkish Prime Minister Tayyip Erdogan traded barbs in January over Iraq's political crisis, sharply raising the temperature between key regional investment partners.
Erdogan warned Baghdad it would not remain silent if Maliki pursued a sectarian conflict; Maliki told Erdogan to stay out of Iraqi politics.
Baghdad also dispatched Oil Minister Abdul-Kareem Luaibi on a diplomatic mission to Tehran when Iran threatened to close Hormuz in response to international sanctions. As the current OPEC president, Luaibi said he wanted Tehran's assurance it was committed to keeping exports flowing.
Iraq loads about 1.7 million barrels a day, more than three-quarters of its exports, in the Gulf, and expects to open a new Gulf terminal in the next few weeks that will add 900,000 bpd to its export capacity.
About 95 percent of Baghdad's budget is funded by crude exports, so any disruption of Hormuz tanker traffic could cripple reconstruction efforts.
Baghdad and Washington have yet to complete any new defence agreements, leaving Iraq vulnerable to external threats in the wake of the U.S. troops departure.
- A new security agreement between Baghdad and Washington
- Rising tension with Turkey, Iran efforts to blockade Gulf
Tension between Arabs and minority Kurds, who have enjoyed virtual autonomy in their northern enclave for 20 years, is festering. U.S. military officials have long considered the northern disputed territories a potential flashpoint for future conflict, particularly now the American troops have gone.
Kurds hope to reclaim areas they deem historically Kurdish.
The Kurds have so far refused to hand over Hashemi, irking Maliki, who has insisted the vice president be tried in Baghdad.
The issue could remain a friction point as the two sides argue over control of oil resources and a deal between the Kurdistan Regional Government and oil giant Exxon Mobil for six exploration blocks in the north.
The central government claims rights over oil reserves and deems deals between foreign oil companies and the Kurdish government illegal. It threatened to void Exxon's contract to develop the rich West Qurna Phase One oilfield in the south.
Baghdad and Arbil failed to present an amended oil law to the Iraqi parliament by the end of 2011 despite a pledge to do so, and there were few signs that the long-awaited legislation would be resolved any time soon.
- Any move to punish Exxon for its Kurdish deal
- Clashes between Kurdish peshmerga and Iraqi troops
- Passage of oil legislation, or a protracted fight
With U.S. troops gone and a political crisis with sectarian overtones raging, insurgents launched some of the largest attacks in a year in late December and January, many of them aimed at Shi'ite neighbourhoods and Shi'ite pilgrims.
Bombings and other attacks have killed more than 450 people and wounded over 1,100 since the start of the political crisis, according to a Reuters tally. In January alone the death toll was over 350, more than double the same month last year.
Political feuds, Sunni discontent or an attack on a holy site could rekindle violence. Attacks on oil facilities could push up global oil prices.
- Attacks on oil facilities or foreign oil workers
- Major attacks in Baghdad testing local forces (Editing by Sophie Hares)