(Adds ambassador summoning, Sistani, protests)
By Maher Chmaytelli
BAGHDAD, Dec 7 (Reuters) - Iraq demanded on Thursday that the U.S. government backtrack on a decision to recognise Jerusalem as Israel's capital and summoned the U.S. ambassador in Baghdad to protest the decision.
U.S. President Donald Trump reversed decades of U.S. policy on Wednesday and recognised Jerusalem as the capital of Israel, imperiling Middle East peace efforts and upsetting the Arab world and Western allies alike.
Shi'ite-majority Iraq is the only country to have an alliance with regional powerhouse Iran and the United States, who do not see eye-to-eye.
The Iraqi Foreign Ministry said it had summoned the U.S. ambassador in Baghdad and that it would hand him a memo protesting Trump's decision.
"We caution against the dangerous repercussions of this decision on the stability of the region and the world," an Iraqi government statement said.
"The U.S. administration has to backtrack on this decision to stop any dangerous escalation that would fuel extremism and create conditions favourable to terrorism," it said.
Iraq's top Shi'ite cleric Grand Ayatollah Ali al-Sistani condemned the decision and called on the "Umma", or Islamic nation, to unite its efforts and reclaim Jerusalem.
"This decision is condemned and decried, it hurt the feelings of hundreds of millions of Arabs and Muslims," his office said in a statement.
"But it won't change the reality that Jerusalem is an occupied land which should return to the sovereignty of its Palestinian owners no matter how long it takes," it said.
Dozens of Iraqis protested the decision in Baghdad, carrying signs saying "Jerusalem is Arab" and vowing to return in greater numbers the following day after Friday prayers.
A prominent Iraqi militia, the Iran-backed Harakat Hezbollah al-Nujaba, said Trump's decision could become a "legitimate reason" to attack U.S. forces in Iraq.
"Trump's stupid decision to make Jerusalem a capital for the Zionist will be the big spark for removing this entity from the body of the Islamic nation, and a legitimate reason to target American forces," said the group's leader Akram al-Kaabi.
The United States is leading an international coalition helping Iraq fight Islamic State and has provided air and ground support. It has more than 5,000 troops in Iraq.
Nujaba, which has about 10,000 fighters, is one of the most important militias in Iraq. Though made up of Iraqis, it is loyal to Iran and is helping Tehran create a supply route through Iraq to Damascus.
It fights under the umbrella of the Popular Mobilisation Forces (PMF), a mostly Iranian-backed coalition of Shi'ite militias that played a role in combating Islamic State. The PMF is government sanctioned and formally reports to Prime Minister Haider al-Abadi's office. (Reporting by Maher Chmaytelli; Additional reporting by Huda Majeed; Writing by Ahmed Aboulenein; Editing by Larry King)
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