UPDATE 2-Iraq Kurds expect substantial surplus in gas deal

* Deal to provide enough gas to kick start Nabucco

* Iraq's central government rejects deal

* KRG says deal to improve commercial ties with Turkey

(Recasts with Kurdish statement)

By Mohammed Abbas and Shamal Aqrawi

BAGHDAD/ARBIL, Iraq, May 18 (Reuters) - Iraq's largely autonomous Kurdish region welcomed on Monday an $8 billion natural gas plan from a bloc of European and Arab firms that it said could provide gas for Europe.

The Kurdish government, which has pursued its own oil contracts despite condemnation from Iraq's central government in Baghdad, said supplies from a new $8 billion plan to tap the region's rich gas fields would focus on the domestic market.

Austria's OMV (OMVV.VI) and Hungary's MOL MOLB.BU have joined forces with the United Arab Emirates' Crescent Petroleum and affiliate Dana Gas DANA.AD in a deal that could provide enough gas to kick start the Nabucco pipeline project and reduce Europe's reliance on Russian gas.

"We are certain that there will be substantial surplus volumes of gas available to satisfy the needs of the Nabucco pipeline project from the currently discovered gas fields and from many other license areas currently under exploration and appraisal," the KRG said in a statement.

Yet the statement is thrust into doubt by a condemnation from the central government, which said it would not recognise any agreement done without backing of the Iraqi Oil Ministry.

"The government rejects any deal that does not include Iraq's federal Ministry of Oil," said spokesman Ali al-Dabbagh.

The gas deal is the latest twist in a long feud between Iraq's central government abd the KRG, which has signed energy deals with foreign firms the Oil Ministry deems illegal.

The KRG, meanwhile, condemns the Iraqi Oil Ministry's failure to boost exports from levels that are still below what they were before the U.S.-led invasion of Iraq in 2003.

LONG IMPASSE ON OIL

Earlier this month, the two sides appeared to have reached a breakthrough when the Oil Ministry -- desperate to boost exports as the oil-reliant government faces a budget crunch due to lower oil prices -- said it would permit Kurdish oil exports through a national pipeline starting in June.

Now, detente looks doubtful.

"The Ministry of Oil in Baghdad should be held accountable for its past failures and inefficiencies. It will be soon forced to adopt market-driven policies to boost production and revenues for the country," the KRG said.

The KRG said it was prepared to supply the Nabucco deal "on arm's length commercial terms to be agreed with the KRG."

"Under the prevailing legal and contractual arrangements practiced in the Kurdistan Region, the (Kurdish) government is entitled to the lion's share of any oil and gas produced by the contractors after their respective cost recoveries," it said.

It said revenues from the gas would be shared among all Iraqi people, but the details on how that would occur were not immediately clear.

The KRG also said that the deal would improve commercial ties between Kurdistan in Iraq's north and neighbouring Turkey. (Reporting by Shamal Aqrawi in Arbil and Mohammed Abbas in Baghdad; writing by Mohammed Abbas and Missy Ryan)