By Ahmed Rasheed and Isabel Coles
BAGHDAD/ARBIL, Iraq, June 12 (Reuters) - Iraqi Kurds seized control of the northern oil city of Kirkuk on Thursday, while surging Sunni Islamist rebels advanced towards Baghdad, as the central government's army abandoned its posts in a rapid collapse that has lost it control of the north.
Peshmerga fighters, the security forces of Iraq's autonomous Kurdish north, swept into Kirkuk after the army abandoned its posts there, a peshmerga spokesman said.
"The whole of Kirkuk has fallen into the hands of peshmerga," said Jabbar Yawar. "No Iraqi army remains in Kirkuk now."
Kurds have long dreamed of taking Kirkuk, a city with huge oil reserves just outside their autonomous region, which they regard as their historical capital. The swift move by their highly organised security forces demonstrates how this week's sudden advance by fighters of the Al Qaeda offshoot Islamic State of Iraq and the Levant (ISIL) has redrawn Iraq's map.
Since Tuesday, black clad ISIL fighters have seized Iraq's second biggest city Mosul and Tikrit, hometown of former dictator Saddam Hussein, as well as other towns and cities north of Baghdad. They continued their lightning advance on Thursday, moving into towns just an hour's drive from the capital.
The army of the Shi'ite-led government in Baghdad has essentially fled in the face of the onslaught, abandoning buildings and weapons to the fighters who aim to create a strict Sunni Caliphate on both sides of the Iraq-Syria frontier.
Security and police sources said militants now controlled parts of the small town of Udhaim, 90 km (60 miles) north of Baghdad, after most of the army troops left their positions and withdrew towards the nearby town of Khalis.
"We are waiting for supporting troops and we are determined not to let them take control. We are afraid that terrorists are seeking to cut the main highway that links Baghdad to the north," said a police officer in Udhaim.
In Tikrit, militants have set up military councils to run the towns they captured, residents said.
"They came in hundreds to my town and said they are not here for blood or revenge but they seek reforms and to impose justice. They picked a retired general to run the town," said a tribal figure from the town of Alam, north of Tikrit.
"'Our final destination will be Baghdad, the decisive battle will be there,' that's what their leader of the militants group kept repeating," the tribal figure said.
Security was stepped up in Baghdad to prevent the Sunni militants from reaching the capital, which is itself divided into Sunni and Shi'ite neighbourhoods and saw ferocious sectarian street fighting in 2006-2007 under U.S. occupation.
The stunning advance of ISIL, effectively seizing northern Iraq's main population centres in a matter of days, is the biggest threat to Iraq since U.S. troops withdrew in 2011.
The administration of President Barack Obama has come under fire for failing to do enough to shore up the government in Baghdad before pulling out its troops.
The million-strong Iraqi army, trained by the United States at a cost of nearly $25 billion, suffers from low morale. Its effectiveness is hurt by the view in Sunni areas that it represents the hostile interests of the Shi'ite-led government.
In Washington, an Obama administration official said the government of Iraqi Prime Minister Nuri al-Maliki had in the past sought U.S. air strikes against ISIL positions. The White House suggested such strikes were not being considered and said Washington's main focus now is on building up government forces.
Iraq's parliament is due to hold an extraordinary session on Thursday to vote on declaring a state of emergency which should expand the powers of Shi'ite Prime Minister Nuri al-Maliki.
About 500,000 Iraqis have fled Mosul, home to 2 million people, and the surrounding province, many seeking safety in autonomous Kurdistan, a region that has prospered while patrolled by the powerful peshmerga, avoiding the violence that has plagued the rest of Iraq since the U.S. invasion in 2003.
The Kurdish capture of Kirkuk instantly overturns the fragile balance of power that has held Iraq together as a state since Saddam's fall.
Iraq's Kurds have done well since 2003, running their own affairs while being given a fixed percentage of the country's overall oil revenue. But with full control of Kirkuk - and the vast oil deposits beneath it - they could earn more on their own, eliminating the incentive to remain part of a failing Iraq.
Maliki's army already lost control of much of the Euphrates valley west of the capital to ISIL last year, and with the evaporation of the army in the Tigris valley to the north this week, the government could be left in control only of Baghdad and areas south.
The surge also potentially leaves the long desert frontier between Iraq and Syria effectively in ISIL hands, advancing its stated goal of erasing the border altogether and creating a single state ruled according to mediaeval Islamic principles.
Maliki described the fall of Mosul as a "conspiracy" and said the security forces who had abandoned their posts would be punished. He also said Iraqis were volunteering in several provinces to join army brigades to fight ISIL.
In a statement on its Twitter account, ISIL said it had taken Mosul as part of a plan "to conquer the entire state and cleanse it from the apostates", referring to the province of Nineveh of which the city is the capital.
Militants were reported to have executed soldiers and policemen after their seizure of some towns.
In Mosul, 80 Turkish citizens were being held hostage by ISIL, the foreign ministry in Ankara said, after its consulate there was overrun. Turkey threatened to retaliate if any of the group, which included special forces soldiers, diplomats and children, were harmed.
Ambassadors of the NATO defence alliance held an emergency meeting in Brussels at Turkey's request and Prime Minister Tayyip Erdogan held talks with U.S. Vice President Joe Biden about the developments.
ISIL, led by Abu Bakr al-Baghdadi, broke with al Qaeda's international leader, Osama bin Laden's former lieutenant Ayman al-Zawahri, and has clashed with al Qaeda fighters in Syria.
In Iraq, it has carried out endless bombings against Shi'ite civilians, killing hundreds a month.
The violence in Iraq raised fears about the outlook for oil supplies, with futures prices in New York pushed higher towards $110 a barrel. (Reporting by Ahmed Rasheed and Isabel Coles; Editing by Oliver Holmes, Samia Nakhoul and Peter Graff)
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