* Top security official: direct trade "like dividing Iraq"
* Kurds push on with own oil pipeline
* Turkey trade links grow with Iraqi Kurdistan
By Peg Mackey
LONDON, March 19 (Reuters) - Rising oil trade between Iraqi Kurdistan and Turkey threatens to split Iraq in two, a senior Iraqi official said, as the autonomous region ignores Baghdad's threats of tough action against what it terms illegal exports.
Oil lies at the heart of a long-running feud between the central government and the autonomous Kurdistan region. Baghdad says it alone has the authority to control exports and sign contracts, while the Kurds say their right to do so is enshrined in Iraq's federal constitution.
"If oil from Kurdistan goes through Turkey directly, that will be like dividing Iraq. This is our big concern," Iraq's Deputy National Security Adviser Safa al-Sheikh Hussein said on the sidelines of an Iraq conference.
The Kurdistan Regional Government (KRG) started on the path towards economic independence early this year by exporting small volumes of crude oil by truck to Turkey.
The move further angered Baghdad, which threatened action against the region and foreign oil companies working there to stop the exports, which it says are illegal.
KRG crude used to be shipped to world markets through a Baghdad-controlled pipeline running from Kirkuk to the Turkish port of Ceyhan, but exports via that channel dried up in December due to a payment row with Baghdad.
The northern region is now pushing ahead with plans to build its own oil export pipeline to Turkey, despite objections from the United States, which fears the project could lead to the break-up of Iraq.
KRG Energy Minister Ashti Hawrami has said a gas pipeline now being laid can be converted to ship up to 300,000 barrels per day of crude by June.
"Kurdistan is almost independent and they want more gains now," said Hussein, deputy of the National Security Council, created in 2004 as a forum for security decision-making. "They are a little over-confident and overly ambitious."
For its part, energy-hungry Turkey has increasingly courted Iraqi Kurds as relations with the Shi'ite-led central government in Baghdad have soured and it now ranks as a major trading partner for the autonomous region.
A broad energy partnership between Turkey and Iraqi Kurdistan ranging from exploration to export has been in the works since last year.
Though steadily developing more energy autonomy, the region still relies on the central government for a share of the national budget from oil revenues.
"There's a lot of tension with the Kurds," said Hussein. "I don't think it can be resolved this year, but maybe we can contain it."
Kurdistan's exploration contracts with oil majors like Exxon Mobil and Chevron are a further source of friction that have prompted Baghdad repeatedly to warn companies they risk losing their assets in the south of the country.
Exxon has been weighing whether to sell out of the giant, southern West Qurna-1 oilfield, but industry sources say Iraq's Prime Minister Nuri al-Maliki offered the company substantially improved terms in January to keep it at the $50 billion project.
Since then, Iraqi and Kurdish officials have both suggested Exxon will side with them.
Hussein said that if Exxon were to start to drill in territories disputed with Kurdistan, "there will be a legal response ... to end all (of Exxon's) work in the rest of Iraq."
"We are determined to resolve our problems peacefully, but this can influence the integrity of Iraq," he said.
Officials from Exxon and Iraqi Kurdistan last month visited the Qara Hansher oil exploration block that lies in disputed territories where both regions claim jurisdiction and discussed building a camp there.
And industry sources said the U.S. major has drilled three water wells at the al-Qush block, also in the disputed zone, in preparation to start drilling by early June.
The oil dispute has been accompanied by an increase in military tension between the two regions.
Last year, Iraqi national army and Kurdish Peshmerga forces both sent troops to reinforce their rival positions around towns dotted along the disputed territories, including the sensitive ethnically mixed town of Kirkuk.
"Neither side wants to end this militarily," said Hussein, a former Brigadier General in Iraq's Air Force.