* Army and militias surround town held by Islamic State
* Latest stage in push towards big prize of Mosul
* PM says aim is 'cleansing every inch of Iraqi land'
* U.N. seeks funds to help people displaced by fighting (Adds details, context)
By Ghazwan Hassan
TIKRIT, Iraq, Sept 20 (Reuters) - Iraqi forces launched an operation on Tuesday to retake the northern town of Shirqat from Islamic State, a stepping stone in their campaign to recapture the jihadists' stronghold of Mosul before the end of the year.
Shirqat, which lies on the Tigris River 100 km (60 miles) south of Mosul, has been surrounded by Iraqi troops and Iranian-backed Shi'ite Muslim militias allied to the government.
Tens of thousands of civilians are thought to be trapped there. Officials have warned for months of a humanitarian disaster inside, where residents living under Islamic State's harsh rule say food supplies have dwindled and prices soared.
Iraqi troops, backed by local police and Sunni Muslim tribal fighters, took up positions along five axes on Tuesday and advanced through five villages but by midday were still around 13 km from the town centre, said the mayor and a source in the Salahuddin Operations Command, which oversees military operations in the area.
They said there was little resistance so far, aside from some bombs planted along the road. State media said the security forces had disabled several car bombs and snipers.
Television footage of an airstrike near a residential compound south of Shirqat showed plumes of light grey smoke emanating from a sparsely populated valley.
Iraqi forces are also moving to retake two areas in the western province of Anbar, Prime Minister Haider al-Abadi said in an televised message from New York, where he is attending the United Nations General Assembly.
"These operations pave the way for cleansing every inch of Iraqi land and, God willing, its end will be the liberation of Mosul city, ... the liberation of all Iraqi lands and the end of Daesh," he said, using an Arabic acronym for Islamic State.
He has pledged repeatedly to retake Mosul by year's end, and Iraqi commanders have indicated the push could begin by late October, though doubts remain that the necessary troops will be ready.
READY FOR MOSUL?
After meeting with Abadi in New York on Monday, U.S. President Barack Obama said he hoped for progress on Mosul by the end of the year. The top U.S. general later said Iraqi forces would be ready in October, but the timing was up to Abadi.
Lise Grande, the U.N. humanitarian coordinator for Iraq, on Monday appealed for more funding to help people displaced by the conflict. "We're very worried that we won't be able to prepare in time" for the Mosul battle, she said in a statement.
U.S. and Iraqi officials are also concerned there has not been enough planning for how to manage Mosul, Iraq's second-largest city and a mosaic of ethnic and sectarian groups, if and when Islamic State is kicked out.
The city fell to the jihadists in 2014 after Iraq's army and police dropped their weapons and fled, despite having received billions of dollars in aid since a U.S.-led invasion toppled Saddam Hussein in 2003.
The disposition of forces and the treatment of Shirqat's residents, who have been living under Islamic State for more than two years, will be closely watched by the Sunni residents of Mosul, who have a historic mistrust of the forces of successive Shi'ite-led governments in Baghdad.
Shi'ite militias, which have been accused of rights abuses in previous battles, did not look set to participate in Shirqat but could join in at a later stage.
The factions, which deny those allegations or describe them as isolated incidents, were critical in rolling back Islamic State in the immediate aftermath of its surge through northern and western Iraq towards Baghdad two years ago.
Hawija, east of Shirqat, is the other remaining Islamic State bastion south of Mosul. The group also controls the city of Tel Afar, west of Mosul towards the Syrian border.
(Additional reporting and writing by Stephen Kalin; Editing by Mark Trevelyan)
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