* Iraqi forces reach the edge of Kurdistan region
* Top Shi'ite cleric urges protection of Kurds
* Sides accuse each other of using Western arms (Adds U.S. State Department comment)
By Maher Chmaytelli and Raya Jalabi
BAGHDAD/ERBIL, Iraq, Oct 20 (Reuters) - Iraqi forces on Friday took control of the last district in the oil-rich province of Kirkuk still in the hands of Kurdish Peshmerga fighters following a three-hour battle, security sources said.
The district of Altun Kupri, or Perde in Kurdish, lies on the road between the city of Kirkuk - which fell to Iraqi forces on Monday - and Erbil, capital of the semi-autonomous region of Kurdistan in northern Iraq that voted in a referendum last month to secede from Iraq against Baghdad's wishes.
A force made up of U.S-trained Iraqi Counter-Terrorism Service units, Federal Police and Iranian-backed fighters known as Popular Mobilisation began their advance on Altun Kupri at 7:30 a.m. (0430 GMT), said an Iraqi military spokesman.
Kurdish Peshmerga forces withdrew from the town, located on the Zab river, after battling the advancing Iraqi troops with machine guns, mortars and rocket-propelled grenades, Iraqi security sources said. Neither side gave information about casualties.
The Iraqi central government forces have advanced into Kirkuk province largely unopposed as most Peshmerga forces withdrew without a fight.
The government advance has transformed the balance of power in northern Iraq and is likely to scuttle the independence aspirations of the Kurds, who voted overwhelmingly on Sept. 25 to secede from Iraq and take the oil fields of Kirkuk with them.
The fighting at Altun Kupri marked only the second instance of significant violent resistance by the Kurds in Kirkuk province. Dozens were killed or wounded in the previous clash on Monday, the first night of the government advance.
The U.S. State Department said it was concerned by reports of violent clashes around Altun Kupri.
"In order to avoid any misunderstandings or further clashes, we urge the central government to calm the situation by limiting federal forces' movements in disputed areas to only those coordinated with the Kurdistan Regional Government," it said in a statement.
The State Department made clear that even though federal authority was reasserted over "disputed areas", that in no way changes their status - "they remain disputed until their status is resolved in accordance with the Iraqi resolution" in what appeared to be a nod to the Kurds and their assertion that they have a stake in these territories.
Altun Kupri is the last town in Kirkuk province on the road to Erbil, lying just outside the border of the autonomous region established after the fall of Saddam Hussein in 2003. Iraqi forces are seeking to reestablish Baghdad's authority over territory which the Kurdish forces occupied outside the official boundaries of their autonomous region, mostly seized since 2014 in the course of the war on Islamic State militants.
Iraq's top Shi'ite cleric, Grand Ayatollah Ali al-Sistani, called on Friday for the state to protect Kurds in northern Iraq, a rare political intervention by a figure whose words have the force of law for most of Iraq's Shi'ite majority.
Sistani's call, issued at the Friday prayer in the holy Shi'ite city of Kerbala by one of his representatives, came amid reports of abuses against Kurds in areas evacuated by the Kurdish Peshmerga including Kirkuk, Tuz Khormato and Khanaqin.
Kurdish officials said tens of thousands of Kurds fled Kirkuk and Tuz to the two main cities of the Kurdish autonomous region, Erbil and Sulaimaniya.
Iraq's post-Saddam constitution allows the Kurds self rule in three mountainous northern provinces and guarantees them a fixed percentage of Iraq's total oil income, an arrangement that saw them prosper while the rest of the country was at war.
Although Kirkuk is outside the autonomous region, many Kurds consider it the heart of their historic homeland and its oil to be their birthright. Its loss makes their quest for independence appear remote, since it would leave them with only about half the oil revenue they had sought to claim for themselves.
Kurdish Peshmerga moved into Kirkuk without a fight in 2014, taking over positions left by the Iraqi army as it fled in the face of Islamic State militants.
Iraqi and Kurdish forces traded accusations of using weapons that Western powers had originally given them to fight Islamic State.
"Iraqi forces use U.S. Humvees, tanks in latest offensive against Peshmerga," tweeted Hemin Hawrami, KRG President Masud Barzani's assistant.
"Today, Popular Mobilisation attacked us with American weaponry. What is this agreement between the Americans and the Iranians?" said Harem Shukur, a Peshmerga fighter outside Altun Kupri. "The Americans sold us to Iran," he added, echoing widespread bitterness among Kurds who think the United States did not honour friendly ties built over several decades.
An Iraqi military spokesman accused the Peshmerga of using rockets supplied by Germany. Germany said it hoped to resume its mission training Kurdish Peshmerga fighters in northern Iraq on Sunday, provided the conflict did not worsen. Berlin suspended it last week as tensions mounted. (Reporting by Maher Chmaytelli in Baghdad and Mustafa Mahmoud in Kirkuk; Eric Walsh in Washington; Editing by Andrew Heavens and James Dalgleish)
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