UPDATE 2-Turkey warns citizens to leave all but Iraq's Kurdish north
* Turkey says 'negative propaganda' being spread against it
* Warns Turks to leave eight more provinces
* Local agency says 60 foreigners seized near Kirkuk
* Jihadi militants already holding 80 Turkish citizens (Adds foreign ministry, President Gul, opposition comment)
By Tulay Karadeniz and Asli Kandemir
ANKARA, June 18 (Reuters) - Turkey extended a warning to its citizens in Iraq to leave all but the Kurdish-run north on Wednesday, citing a potential battle for Baghdad and saying "negative propaganda" was being spread against it in the Shi'ite-dominated south of the country.
The foreign ministry urged Turks to leave eight more provinces south of Baghdad, meaning its advisory now covers all of the country apart from the autonomous, relatively peaceful Kurdish region partly bordering Turkey.
"Iraq's security crisis continues to deepen and has reached a critical point in which civilians are being targeted," the ministry said in a statement.
It said Iraqi Shi'ite militias were being deployed to Baghdad to defend against attacks by Sunni Islamist insurgents who overran much of northern Iraq last week, and said "false accusations" were being made against Turkey and other foreign countries in Shi'ite areas.
Turkey has long had a tense relationship with Iraqi Prime Minister Nuri al-Maliki's Shi'ite-led government, which some Turkish politicians say is pursuing a sectarian agenda.
"Turks and Turkey are seen as Sunnis in the southern regions (of Iraq). There is this perception that if you are Sunni, you are supporting the insurgents," a foreign ministry official said.
Turkey's Dogan news agency said militants from the Islamic State in Iraq and the Levant (ISIL) had seized 60 people, including 15 Turks, who were building a hospital near the town of Dour in Salahuddin province, close to the oil city of Kirkuk.
Istanbul-based Dogan said those abducted included workers from Pakistan, Bangladesh, Nepal and Turkmenistan, quoting a worker who was freed along with other Sunni Muslims let go by the Sunni militants.
"The embassy in Baghdad is investigating the reports," a Turkish foreign ministry official said, giving no more details and declining to be named due to the sensitivity of the issue.
Separately, India said it had lost contact with 40 Indian builders who may have been kidnapped in Mosul after Iraq's second city was overrun by ISIL 10 days ago.
"IMPOSSIBLE TO KNOW WHO'S WHO"
The reported abductions came a week after 80 Turkish nationals were seized by ISIL in the northern Iraqi city, 49 of them snatched from the Turkish consulate, including special forces soldiers, diplomats and children.
Prime Minister Tayyip Erdogan has said those taken from the consulate are unharmed and efforts are under way to secure their release, but the attack drew criticism of his government for failing to foresee the danger and evacuate the mission sooner.
The lightning offensive by ISIL and other Sunni militants threatens to fragment Iraq and leaves Turkey facing a widening Islamist insurgency in two of its southern neighbours, with ISIL also making territorial gains in Syria near the Turkish border.
"The developments in our region, in Iraq and Syria, are extremely saddening for all of us," Turkish President Abdullah Gul said during a visit to the northwestern town of Kirklareli, saying radical groups were exploiting a political vacuum.
"We made repeated warnings, as Turkey, to avoid such a scenario ... But unfortunately now there is chaos, with various groups fighting. It's impossible to know who's who any more and our first priority is to protect Turkey and keep it out of this."
Turkey has been one of Syrian President Bashar al-Assad's fiercest critics, allowing the Syrian political opposition to organise on its soil and maintaining an open border policy which, initially at least, allowed fighters and supplies to cross into insurgent territory.
That policy has left it open to accusations that it did too little to prevent foreign fighters swelling the ranks of radical groups including al Qaeda splinter group ISIL, a charge the government denies. It has since tightened border controls.
Sezgin Tanrikulu, a leading member of the main opposition Republican People's Party, called on Wednesday for a parliamentary investigation into the suspected activities of al Qaeda and its affiliates in Turkey.
"I request that a parliamentary investigation be opened into determining whether effective counter-terrorism methods are being used against the terrorist organisations' activities within Turkish borders," he said in a petition to parliament.
Erdogan, eager to avoid negative publicity ahead of an August presidential election in which he is expected to stand, has accused the opposition of trying to make political capital out of the events in Iraq and Syria.
Turkey's broadcasting authority this week imposed a ban on media reporting about the diplomats and soldiers seized in Mosul on the grounds of protecting their safety.
The foreign ministry said on Saturday the group had had no option but to surrender after hundreds of heavily armed militants surrounded their consulate building.
As a precaution, Turkey evacuated its consulate in the southern Iraqi city of Basra on Tuesday - in what Turkish Foreign Minister Ahmet Davutoglu described as a response to an increased security risk.
But Turkish officials have said the embassy in the Iraqi capital Baghdad will remain open for the time being. (Additional reporting by Ayla Jean Yackley in Istanbul; Writing by Nick Tattersall)