* Capture of dam could enable militants to flood cities
* Kurds suffer first major defeat at militants' hands
* Iraq's political paralysis boosts Sunni insurgents
(Adds Kurdish officials comments, paragraphs 4-6, and 36; and
U.S. State Department comment, paragraph 11)
By Ahmed Rasheed and Raheem Salman
BAGHDAD, Aug 3 Islamic State fighters seized
control of Iraq's biggest dam, an oilfield and three more towns
on Sunday after inflicting their first major defeat on Kurdish
forces since sweeping across much of northern Iraq in June.
Capture of the electricity-generating Mosul Dam, after an
offensive of barely 24 hours, could give the Sunni militants the
ability to flood major Iraqi cities or withhold water from
farms, raising the stakes in their bid to topple Prime Minister
Nuri al-Maliki's Shi'ite-led government.
"The terrorist gangs of the Islamic State have taken control
of Mosul Dam after the withdrawal of Kurdish forces without a
fight," said Iraqi state television.
But a Kurdish official in Washington told Reuters the dam
was still under the control of Kurdish "peshmerga" troops,
although he said towns around the dam had fallen to Islamic
"The situation has taken a turn for the worse over the
weekend," said Karwan Zebari, an official with the Kurdistan
Regional Government's office in Washington.
He said peshmerga fighters were preparing for a "major
offensive" Sunday night to take back control of towns near the
The swift withdrawal of the peshmerga troops was an apparent
severe blow to one of the few forces in Iraq that until now had
stood firm against the Sunni Islamist fighters who aim to redraw
the borders of the Middle East.
The Islamic State, which sees Iraq's majority Shi'ites as
apostates who deserve to be killed, also seized three towns and
the Ain Zalah oilfield, adding to four others already under its
control that provide funding for operations.
Initially strong Kurdish resistance evaporated after the
start of an offensive to take the town of Zumar. The Islamists
then hoisted their black flags there, a ritual that has often
preceded mass executions of their captured opponents and the
imposition of an ideology even al Qaeda finds excessively harsh.
The group, which has declared a caliphate in parts of Iraq
and Syria to rule over all Muslims, poses the biggest challenge
to the stability of OPEC member Iraq since the fall of Saddam
Hussein in 2003.
The U.S. State Department said in a statement that
Washington was "actively monitoring" the situation in Iraq and
was helping facilitate coordination between Iraq's military and
FIGHTING FOR TOWNS
On Sunday, Islamic State members were also involved in
fighting in a border town far away in Lebanon, a sign of the
group's ambitions across the frontiers of the Middle East.
It controls cities in Iraq's Tigris and Euphrates valleys
north and west of Baghdad, and a section of Syria stretching
from the Iraqi border in the east to Aleppo in the northwest.
Iraq's Kurds, who rule themselves in a northern enclave
guarded by the peshmerga units, had expanded areas under their
control in recent weeks while avoiding direct confrontation with
the Islamic State, even as Iraqi central government troops fled.
But the towns lost on Sunday were in territory the Kurds had
held for many years, undermining suggestions that the Islamic
State's advance has helped the Kurdish cause.
Witnesses said Islamic State fighters were also trying to
take control of the town of Rabia near the Syrian border and
were engaged in clashes with Syrian Kurds who had crossed the
frontier after Iraqi Kurds withdrew.
The latest gains have placed Islamic State fighters near
Dohuk Province, one of three in the autonomous Kurdish region,
which has been spared any serious threat to its security while
war raged throughout the rest of Iraq.
Since thousands of U.S.-trained Iraqi soldiers fled the
Islamic State offensive, the Kurdish fighters were seen
alongside Shi'ite militia to the south as the main lines of
defence against the militants, who vow to march on Baghdad.
By calling into question the effectiveness of the Kurdish
fighters, Sunday's advances may increase pressure on bickering
Iraqi leaders to form a power-sharing government capable of
countering the Islamic State.
Two people who live near Mosul Dam told Reuters Kurdish
troops had loaded their vehicles with belongings including air
conditioners and fled.
Islamic State fighters attacked Zumar from three directions
in pick-up trucks mounted with weapons, defeating Kurdish forces
that had poured reinforcements into the town, witnesses said.
The Islamic State later also seized the town of Sinjar,
where witnesses said residents had fled after Kurdish fighters
put up little resistance. It was not immediately clear why the
Kurds, usually known as formidable fighters, pulled back without
On its Twitter site, the Islamic State posted a picture of
one of its masked fighters holding up a pistol and sitting at
the abandoned desk of the mayor of Sinjar. Behind him was the
image of a famous Kurdish guerrilla leader.
In a statement on its website, the Islamic State said it had
killed scores of peshmerga, the Kurdish fighters whose name
means "those who confront death". Those deaths could not be
"Hundreds fled leaving vehicles and a huge number of weapons
and munitions and the brothers control many areas," the Islamic
State statement said. "The fighters arrived in the border
triangle between Iraq, Syria and Turkey."
The Islamic State has systematically blown up Shi'ite
mosques and shrines in territory it has seized, fuelling levels
of sectarian violence unseen since the very worst weeks of
Iraq's 2006-2007 civil war.
The group, which shortened its name after June's offensive
from the Islamic State in Iraq and the Levant (ISIL), has
stalled in its drive to reach Baghdad, halting just before the
town of Samarra, 100 km (62 miles) north of the capital.
ISLAMIC STATE ADVANCES
The Islamic State has been trying to consolidate its gains,
setting its sights on strategic towns near oil fields, as well
as border crossings with Syria, so that it can move easily back
and forth and transport supplies.
So far, the Islamic State is not near the major oil fields
of the northern city of Kirkuk, which were seized by the Kurds
in the chaos that followed the militant group's advance. It
controls part of a pipeline from Kirkuk to Turkey which has been
idle for months because of its attacks in the area.
The Islamic State has capitalised on Sunni disenchantment
with Maliki, winning support or at least tolerance from some
more moderate Sunni communities in Iraq that had fought against
al Qaeda during the U.S. "surge" offensive of 2006-2007.
Maliki's opponents say the prime minister, a Shi'ite
Islamist who is negotiating to try to stay in power for a third
term after an inconclusive parliamentary election in April, is
to blame for galvanising the insurgency by excluding Sunnis from
power. Kurdish leaders have also called for Maliki to step down
to create a more inclusive government in Baghdad.
The Kurds have long dreamed of their own independent state,
an aspiration that has angered Maliki, who has frequently
clashed with the non-Arabs over budgets, land and oil.
In July, the Kurdish political bloc ended participation in
Iraq's national government in protest against Maliki's
accusation that Kurds were allowing "terrorists" to stay in
Arbil, capital of their semi-autonomous region.
In another move certain to infuriate the Baghdad government,
the Kurdish region is pressing Washington for sophisticated
weapons it says Kurdish fighters need to push back the Islamist
militants, Kurdish and U.S. officials said.
Sunday's withdrawal may help them press their case.
"This justifies all the reasons why Pentagon should help
beef up the peshmerga forces by providing such sophisticated
arms to counterbalance (Islamic State) arms," Zebari, the
Kurdish official in Washington, told Reuters.
Maliki needs the Kurds, who gained experience fighting
Saddam Hussein's forces, to help defend his country from the
Islamic State, whose leader Abu Bakr al-Baghdadi has a $10
million U.S. bounty on his head.
The Islamic State's ambitions have alarmed other Arab states
who fear the group's success could embolden militants
Islamic State fighters were among militants who clashed with
Lebanese forces overnight in and around Arsal, a Lebanese town
on the border with Syria. Thirteen Lebanese soldiers and an
unknown number of militants and civilians were killed in the
fighting, security officials said.
There has been no indication so far whether the advance in
northern Iraq and the fighting in Lebanon were coordinated.
(Reporting by Ahmed Rasheed and Raheem Salman; Additional
reporting by Missy Ryan and Eric Beech in Washington; Writing by
Michael Georgy; Editing by Peter Graff, Tom Heneghan and