* KRG calls plan with BP for Kirkuk illegal
* Baghdad and Kurdistan locked in long oil dispute
* Kurdish region has begun to truck oil to Turkey
By Patrick Markey
BAGHDAD, Jan 18 (Reuters) - Iraq's Kurdistan has defended its oil policy as constitutional, and rejected a deal between Baghdad and BP for an oilfield in the disputed city of Kirkuk as an "illegal" step in the autonomous region's feud with the central government.
The statement came after Iraq's oil minister said Baghdad's government would sue companies exporting crude from Kurdistan, warned of cuts to the self-ruled region's federal budget and announced an accord with BP in Kirkuk.
Iraq's Arab-led central government and Kurdistan Regional Government or KRG, run by ethnic Kurds, are locked in a widening dispute over control of oil revenues, oilfields and territory that is fraying the country's uneasy federal union.
The ethnically mixed city of Kirkuk, sitting on the internal border between Iraq and Kurdistan, is at the heart of their long-running battle over constitutional rights to the OPEC member's crude reserves, the world's fourth-largest.
"Iraq's citizens are simply tired of this sort of language of threat and intimidation, which in the cynical pursuit of narrow political agendas serves only to create division and strife," the KRG said in a statement on its website.
"In terms of oil and gas management, the KRG firmly believes in, and abides by, the letter and spirit of Iraq's permanent, federal constitution."
Speaking to Reuters on Wednesday, Oil Minister Abdul Kareem Luaibi said Baghdad intends to sue Genel Energy - the first company to export oil directly from Kurdistan - and may slash the government's allocated 17 percent budget to the region unless it halts what he rejected as smuggling.
Luaibi announced a preliminary agreement with BP to revive the northern Kirkuk oil field, which - apart from being at the centre of the fight between Kurdistan and Iraq - is suffering massive output declines.
"He reveals details of an illegal and unconstitutional plan to allegedly allow BP to enhance the recovery of some of the depleted fields in Kirkuk... without consulting and obtaining approval of the other parties to the dispute," the KRG said.
The feud between Baghdad and the Kurdistan enclave, which has run its own regional administration and armed forces since 1991, has escalated since the KRG began signing deals with oil majors like Exxon Mobil and Chevron.
Iraq's government claims only it has the constitutional authority to export crude oil and sign deals, but Kurdistan says the constitution allows it to agree to contracts and ship oil independently of Baghdad.
Baghdad and Kurdistan late last year both sent troops to reinforce positions along their internal border in a major escalation of tensions between the two regions, but neither appeared to have the stomach for open conflict.
The KRG has given permission to Genel to truck exports directly from Kurdistan's Taq Taq oilfield to Turkey, bypassing the federal pipeline system linking Kirkuk with the Turkish Mediterranean port of Ceyhan.
While the central government dismisses that as smuggling, the KRG said the barter with Turkey was making up part of Kurdistan's entitlement to 17 percent of refined products since Baghdad was not supplying the full amount.
The regional government also rejected Luaibi's suggestion that Baghdad might cut Kurdistan's 17 percent allocation of the federal budget.
"The federal oil minister is stepping well beyond his remit in speaking about the federal budget, creating yet another smokescreen for the incompetency of his ministry and of the federal administration," it said.
The move to truck oil directly to Turkey came after Kurdistan exports were halted via the Baghdad-controlled Iraq-Turkey pipeline due to a dispute over central government payments to oil companies working in Kurdistan.
Baghdad has made one payment in 2012, but Iraqi officials said last month they would not pay firms a second installment because Kurdistan had failed to reach agreed production under a deal made in September.
The central government says Kurdistan is expected to provide 250,000 bpd to Iraq's 2013 oil export target of 2.9 million bpd. In 2012, the KRG was to contribute 175,000 bpd to the federal budget, but handed an average of 61,000 bpd, Luaibi said.
"Had it not been for the federal government's obstructionist policies, the Kurdistan Region could now be exporting 500,000 barrels per day or some $18 billion per year," the KRG said.