* Bill suggests voters pick candidates, not just parties
* Elections a key test of Iraq's security gains
BAGHDAD, Sept 12 Iraq's cabinet has approved a draft law paving the way for national elections in January, including a shift to an open list allowing voters to pick candidates, not just parties, the government said on Saturday.
The draft legislation, an amended version of the law used to hold Iraq's last national elections in 2005, would now be submitted to Iraq's 275-member parliament for discussion, government spokesman Ali al-Dabbagh said in a statement.
The new proposal would abandon the closed list system used in 2005, in which voters selected only political parties. Since then, the United Nations and other foreign officials have lobbied for an open list system allowing voters to select individual candidates, providing more choice and transparency.
The open list system was used in January provincial polls. It is seen as favourable to Prime Minister Nuri al-Maliki, who is seeking a second term and may be facing off against erstwhile allies from Iraq's Shi'ite Arab majority.
Dabbagh made no mention of how, under the proposal approved by the cabinet, elections would be held in Kirkuk, the northern oil hub disputed by Kurds, Turkmen and Arabs.
Ethnic disputes over Kirkuk resulted in a delay of January 2009 provincial elections and, when voting was finally held across most of Iraq, they were postponed for Kirkuk province.
The elections are seen as a key test as U.S. troops prepare to withdraw from Iraq, where security has improved sharply but ongoing attacks and deep political divisions raise doubts about whether steps toward greater stability will continue.
U.S. and Iraqi officials expect violence to spike ahead of the vote, which is likely to be characterised by power struggles between Iraq's rival ethnic and sectarian groups as well as between Shi'ite Arab factions.
Another amendment the cabinet proposed was an increase in the number of seats in parliament by 35 to 310.
It would also guarantee five seats for Christian lawmakers in Baghdad and northern Iraq and one seat for members of the pre-Islamic Yazidi sect, in addition to seats for several other minorities. Women would make up at least a quarter of the new parliament under the cabinet's proposal.
If Iraq can hold the vote in peace, it could help silence critics who fear Iraq is not ready to handle their own security.
A remarkably peaceful voting day in January's local polls raised hopes Iraq could be on the verge of a new era. More than seven months later, though, parts of Baghdad and northern Iraq remain plagued by insurgency and ongoing bloodshed. (Reporting by Khalid al-Ansary; Writing by Tim Cocks; Editing by Matthew Jones)