Iraqi forces Friday retook positions controlled by Kurdish peshmerga fighters since 2014 in the oil-rich province of Kirkuk amid a bitter row with the Kurds over a vote for independence last month.
A senior Kurdish official said thousands of heavily armed fighters had been deployed to defend themselves "at any cost" against the Iraqi operation and called for international intervention.
Ethnically divided but historically Kurdish-majority Kirkuk is one of several regions that peshmerga fighters took over from the Iraqi army in 2014 when Islamic State (IS) group swept through much of northern and western Iraq.
Baghdad is bitterly opposed to Kurdish ambitions to incorporate the oil-rich province in its autonomous region in the north and has voiced determination to take it back.
The Iraqi army and the peshmerga have been key allies of the US-led coalition in its fights against IS and the threat of armed clashes between them poses a major challenge for Western government.
"The Iraqi armed forces are advancing to retake their military positions that were taken over during the events of June 2014," an army general told AFP, asking not to be identified.
Speaking from an area south of the provincial capital Kirkuk, the general said federal troops had retaken "Base 102" west of the city after peshmerga fighters withdrew during the night without a fight.
The peshmerga's Kirkuk commander, Jaafar Sheikh Mustafa, said his forces had withdrawn from areas they had recently entered during fighting against IS in the west of the province.
- 'We will fight' -
"We withdrew to our lines in the area around Kirkuk and we will defend the city in the event of an attack," he said.
"If the Iraqi army advances, we will fight."
Kurdish media said the peshmerga had withdrawn from around 72 square kilometres (28 square miles) of territory.
Sheikh Mustafa said there had been an attempt to negotiate an agreed disengagement of forces through Iraqi Prime Minister Haider al-Abadi but it had been overruled by field commanders.
A top aide to Iraqi Kurdish leader Massud Barzani vowed the peshmerga would defend their positions "at any cost".
"Thousands of heavily armed peshmerga units are now completely in their positions around Kirkuk," Hemin Hawrami said.
"Their order is to defend at any cost."
The Kurdish authorities accused the Popular Mobilisation Forces (PMF) -- paramilitary units dominated by Iran-trained Shiite militia -- of massing fighters in two mainly Shiite Turkmen areas south of Kirkuk in readiness for an attack.
Hawrami urged the international community to intervene and call on the Iraqi prime minister to "order PMF to pull back if he can or if they listen to him".
Iraqi Kurdish premier Nechirvan Barzani urged Grand Ayatollah Ali Sistani, Iraq's highest Shiite religious authority, to intervene to prevent "a new war in the region" and called for dialogue with Baghdad.
A legislator close to Abadi said Iraqi special forces, police and PMF fighters were advancing "to retake control of the oil fields taken by the peshmerga when IS entered Iraq".
It was "logical for the peshmerga to withdraw" in the face of the advance, said Jassem Jaafar.
The PMF issued no statement but it published photographs of one of its fighters making a victory sign in front of a Kurdish flag.
Hadi al-Ameri, head of the Iran-backed Badr group that is part of the PMF, called on the peshmerga to withdraw, saying it is the Iraqi army's "duty" to retake those positions.
- Lucrative oil fields -
The surge in tensions comes two weeks after Kurdish voters overwhelmingly backed independence in a non-binding referendum that the federal government condemned as illegal.
The September 25 polls were held in the three provinces of the autonomous Kurdish region as well as several other Kurdish-held areas, including Kirkuk.
On Friday, Iraqi President Fouad Massoum, a Kurd, was in Kurdistan for talks with Kurdish officials, sources there said.
Meanwhile, a blast targeted the offices of a Kurdish mobile phone provider in Hilla, south of Baghdad, causing material damage but no casualties, a police source said.
The Kurdistan Regional Security Council said its intelligence reports suggested that Iraqi troops and armour were preparing to take over the Kurdish-held oil fields, an airport and a military base.
The Kurds export an average of 600,000 barrels of oil per day under their own auspices, of which 250,000 bpd come from the three fields they control in Kirkuk province.
Abadi has repeatedly denied any intention of ordering an assault on his own people but tensions have been high for days.
On Friday, residents in Kirkuk city queued at petrol stations with jerry cans to fill up while other civilians took up arms and deployed on the streets.
One of them, Khasro Abdallah, vowed "to defend Kirkuk to the death".
The federal government suspended international air links in and out of Iraqi Kurdistan after the referendum.
It said there could be no negotiations on wider autonomy until Kurdish leaders annul the vote and commit to remaining part of Iraq.