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BAGHDAD, Feb 27 (Reuters) - An impasse over Iraq's budget deepened on Wednesday after meetings between the country's oil minister and his Kurdish counterpart failed to resolve a dispute about payment for oil companies operating in the autonomous north.
Iraq's cabinet approved the $118.6 billion budget in October, but infighting between Shi'ite, Sunni and Kurdish factions has scuttled attempts by lawmakers to pass the draft legislation in parliament.
A Kurdish delegation headed by the region's minister for natural resources, Ashti Hawrami, left Baghdad empty-handed on Wednesday following "tense" meetings with Iraqi oil minister Abdul Kareem Luabi that dragged on for around five hours.
The budget standoff is the latest sign of a long-running row between the central government and the Kurdistan region over how to exploit the world's fourth largest oil reserves and divide the revenues.
Kurdistan says it is owed more than 4 trillion Iraqi dinars, or $3.5 billion to cover the costs accumulated by oil companies operating there over the past three years, but Baghdad rejects those contracts as illegal and has allocated just 750 billion Iraqi dinars ($644.33 million).
"Talks over oil company payments have reached a dead-end," said spokesman for the Kurdish parliamentary bloc Muayad al-Tayeb, describing Baghdad's posture as a tactic to scare off oil companies that have been tempted north by better security and better contract terms.
"Oil companies need to be paid and we are not prepared to bargain on payments," he added.
The deadlock could postpone major infrastructure projects and payments to regional authorities in the OPEC producer, whose state coffers are filled almost entirely by the proceeds of crude exports.
A Shi'ite lawmaker from Prime Minister Nuri al-Maliki's State of Law coalition said the Kurds were not entitled to compensation because they had not contributed their fair share to national exports.
"They have been halting oil exports for months and now they want payment: that's not acceptable," Abbas al-Bayati said.
Kurdish crude used to be shipped to world markets through a Baghdad-controlled pipeline to Turkey, but exports via that channel dried up last year as result of the payment row.
A year after the last U.S. troops withdrew, Iraq's economy is improving and should grow 9 percent this year as oil production expands, according to central bank projections.
However, it still needs investment in everything from infrastructure to transport to rebuild the economy, and key oil and investment laws languish in parliament because of political turmoil.
"It's difficult to reach an agreement because Baghdad is dealing with this as a political issue rather than a technical one," said Kurdish lawmaker Farhad Atroshi. (Reporting by Ahmed Rasheed; Writing by Isabel Coles; Editing by Andrew Heavens)