* Iraq releases senior Shi'ite militia member
* Reports say could hasten British hostages' release
BAGHDAD, June 9 Iraq said on Tuesday it had freed a senior member of a Shi'ite Muslim militia group, a move media reports said could hasten the release of British hostages captured in Baghdad more than two years ago.
However, the Iraqi government said it was not negotiating for the hostages' freedom and that Laith Khazali's release was part of broader efforts to draw armed groups away from violence and into the political process.
"He was released on Sunday. The government is not part of any negotiation. His release is part of reconciliation efforts," Iraqi government spokesman Ali al-Dabbagh said.
Khazali had been held by U.S. forces but was transferred to Iraqi custody a day earlier.
British officials have urged caution in drawing any links between Khazali's release and the fate of the British hostages.
But British and U.S. media reports said it was central to negotiations on securing the freedom of Britons Peter Moore -- a computer instructor -- and his four bodyguards.
The five men were seized in a raid by a Shi'ite militant group on an Iraqi Finance Ministry building in May 2007.
Britain called for their immediate and unconditional release late last month.
"The Government of Iraq is engaged in a reconciliation process with groups willing to set aside violence in favour of political engagement," the British Foreign Office said in a statement on Tuesday.
"Part of the process is the releasing of coalition detainees, or their transfer into the custody of the Government of Iraq."
Khazali had been a member of anti-American Shi'ite cleric Moqtada al-Sadr's powerful Mehdi Army militia, but Sadrist sources said Khazali went on to join or form a splinter group, Asaib al-Haq, or Leagues of Righteousness.
Sadr has publicly distanced himself from the group.
In February last year, a video featuring Moore, who appeared tired but not distressed, was aired by Dubai-based Al Arabiya television in which he called on the British government to secure their release.
Another video released in March, shown to relatives but not made public, showed Moore saying he and the other men were well, and also urging government efforts to gain their freedom.
The British military, which was the main U.S. ally during the 2003 invasion of Iraq, is withdrawing from southern regions after officially ending its mission there in March. (Reporting by Mohammed Abbas and Khalid al-Ansary in Baghdad, and Luke Baker in London: Editing by Daniel Wallis)