* Kurds threaten to walk out of Nineveh council
* Kurd-Arab tensions have allowed al Qaeda to thrive
MAKHMOUR, Iraq, Sept 5 (Reuters) - Iraqi Kurdish mayor Barzan Said Kaka says he has no choice but to declare independence from the largely Arab-run council of violent Nineveh province -- it's infiltrated with insurgents and killers, he says.
"We hoped to see a new Iraq, with all Iraqis living together but it's not happening," said Kaka, mayor of the run down, mostly Kurdish market town of Makhmour.
"The governing council only cares about Arabs, not Kurds ... And they support those groups that kill our people."
Such accusations are becoming common in the testy stand off between Kurdish and Arab politicians in ethnically-mixed north Iraq, where a row over oil and land has alarmed officials and raised fears it could become the faultline of Iraq's next war.
In one such dispute, Atheel al-Nujaifi, the Arab governor of Nineveh whose inflammatory rhetoric against Kurds won his party a comfortable victory in local polls in January, has so upset mayors in 16 Kurdish areas that they're threatening to secede.
The tensions have been worsened by a determined insurgency that is still killing dozens of Iraqis in gun and bomb attacks as al Qaeda and other groups seek to foment ethnic conflict in their last remaining stronghold in the provincial capital Mosul.
A series of huge bombings last month triggered accusations of blame between Arabs and Kurds, escalating a dispute that has played into the hands of al Qaeda and some former members of Saddam Hussein's Baath party who joined the insurgency.
Atheel, a Sunni, is himself a former Baathist, although members of his al-Hadba party have been targeted by insurgents.
"He's never even acknowledged (insurgents) as terrorists. He calls them resistance fighters and refuses to condemn them," said Kaka. "We're quitting the council ... We have no voice."
Kurds also claim to have been excluded from positions of power in the province and kept out of its decision-making.
Atheel has warned that he will dissolve any local council that tries to break off from the province. He denies accusations of favouritism towards Arabs or links to insurgent groups. He accuses the Kurds of excluding themselves from the governorate.
"Nothing like what they accuse us of is actually happening," he told Reuters in Mosul, the provincial capital. "There are Turkmen and other non-Arabs in the governing council. But the (Kurdish) ...list are not interacting with us."
When Iraqis voted in the Sunni Arab al-Hadba party to Nineveh in January's provincial polls, diplomats predicted it would help sooth the violence by giving Sunni Arabs a voice -- and because many of the attacks were being carried out by former Baathists to whom al-Hadba was expected to appeal.
The previous council had been Kurd dominated because Sunni Arabs boycotted the last polls in 2005, leaving them disenfranchised.
But the violence hasn't stopped and if anything tensions between Kurds and Arabs are worse throughout northern Iraq.
Nineveh's Kurdish areas have been relatively peaceful, although a massive suicide truck bomb in Makhmour in May 2007 killed around 50 people and wounded 70. The town has been quiet since, but residents fear violence could easily return.
"I'm very afraid. If they don't find a solution, there will be ethnic conflict," said Khader Aulla, 66, wearing traditional Kurdish baggy pants and sitting in the shade of his ramshackle shop selling rice, unrefrigerated drinks and plastic goods.
The Kurds are keen to assert claims to disputed land along their border. Arabs in the disputed territories reject the claims.
Massive oil reserves lie at the heart of the broader dispute: the contested areas around the city of Kirkuk are reckoned to contain some 13 percent of Iraq's proven reserves and currently make up about a fifth of its output. Baghdad and the Kurdish regional government are arguing over oil contracts.
And yet, in the verbal tussle between politicians bitterly divided along ethnic lines, it is easy to forget that not all the Iraqis they claim to represent want to take sides.
"I don't know who's right but we don't want more problems," said Mahmoud Selman, 61, a retired Arab soldier.
"This town needs better services -- it looks like it's just suffered an earthquake. That's what I care about," he added, as as a man nearby cooled his face on a leak spraying from a water pipe. (Editing by Michael Christie)
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