* U.S. sees it as "potentially devastating blow"
* U.S. soldier killed in helicopter crash
* Analysts caution may not hinder al Qaeda activities (Adds Biden, paragraphs 4,5; Iraq govt spokesman 10,11)
By Waleed Ibrahim
BAGHDAD, April 19 Al Qaeda's top two leaders in Iraq have been killed, officials said on Monday, in a strike the United States called a "potentially devastating blow" but whose impact analysts said may be limited.
Prime Minister Nuri al-Maliki said al Qaeda's Iraq leader, Abu Ayyub al-Masri, and Abu Omar al-Baghdadi, the purported head of its local affiliate, the Islamic State of Iraq, were found dead in a hole in the ground inside a house after it was surrounded and stormed by troops.
The deaths could be a major setback to the stubborn insurgency at a time when Iraq is emerging from the sectarian slaughter unleashed after the 2003 U.S.-led invasion but still struggling to end suicide bombings and other attacks.
"Their deaths are potentially devastating blows to al Qaeda Iraq," U.S. Vice President Joe Biden told reporters in Washington, adding the operation "demonstrates the improved security strength and capacity of Iraqi security forces."
He said it was an operation led by Iraqi security forces with the support of U.S. troops, one of whom was killed. "The Iraqis have taken the lead in securing Iraq and its citizens by taking out both of these individuals," he said.
The U.S. commander in Iraq, Gen. Ray Odierno, called the deaths "potentially the most significant blow to al Qaeda in Iraq since the beginning of the insurgency."
However, analysts cautioned against reading too much into the strike against a network that did not appear to have much hierarchy but operates mainly through independent cells.
The killings may boost Maliki's stature as he tries to ensure his reappointment as prime minister following a March 7 general election that produced no outright winner.
FORMING IRAQ GOVERNMENT
Maliki's ambitions for a second term are proving to be a stumbling block to the formation of an alliance between Iraq's two main Shi'ite Muslim political groups that would give them the clout to form a government.
Iraqi government spokesman Ali al-Dabbagh said that high value intelligence was found at the site, in particular on the methods used by al Qaeda's affiliates in Iraq to communicate with the group's command structure outside the country.
"Terrorist attacks will not stop because al Qaeda remains active in Iraq. This will weaken their operation because the cell that was arrested will take us to other leaders," he said.
Maliki said Masri, also known as Abu Hamza al-Muhajir and thought to be an Egyptian, and Baghdadi were killed in Thar-Thar, a rural area 80 km (50 miles) northwest of Baghdad that is regarded as a hotbed of al Qaeda activity.
The U.S. military said the operation took place on Sunday 10 km (six miles) southwest of Tikrit, Saddam Hussein's home town.
A U.S. soldier died in a helicopter crash during the assault, the U.S. military said. It had previously said the crash was an accident and not due to hostile fire.
Maliki said the house was destroyed and the bodies of Masri and Baghdadi were found in a hole in the ground where they were hiding. An assistant of Masri and a son of Baghdadi were also killed in the fighting and at least 16 people were arrested.
The Iraqi government has frequently claimed it has arrested major al Qaeda leaders only to be proved wrong, and the reaction of Iraqis was mixed.
"Abu Ayyub passes away and another Abu Ayyub pops up," said one Baghdad resident, Hussein Taher. Another, Abu Nabiel al-Humairi, told Reuters Television, "Eliminating terrorism is great. We want to walk freely in our country and live safely."
Analysts said Masri and Baghdadi were the highest-ranking al Qaeda figures to be targeted in Iraq since the organization's former Iraq chief, Abu Musab al-Zarqawi, was killed by U.S. aircraft in June 2006.
But they said the outcome of talks to form the next government was more relevant to Iraq's future and stability.
"This political situation in Iraq is very volatile at the moment, so while this will be good for Maliki and make headlines for 48 hours it will be forgotten amid the ongoing post-election story," said Peter Harling, an analyst at the International Crisis Group.
"From what we've seen in the past killing leaders like this has never made that much of a difference." (Additional reporting by Ahmed Rasheed, Suadad al-Salhy, Nick Carey and Reuters Television in Baghdad, William Maclean in London, and Phil Stewart in Washington; Writing by Michael Christie; Editing by David Storey)