Iraq's rival parties resume govt coalition talks

* Allawi agrees to resume talks with Maliki

* Shi'ite cleric representative urges progress

BAGHDAD, Aug 20 (Reuters) -Iraq's Prime Minister Nuri al-Maliki and former premier Iyad Allawi have resumed negotiations aimed at forming a government after falling out briefly over a sectarian row, senior politicians said on Friday.

Iraq has drifted in a dangerous political vacuum since a March election produced no outright winner. Attacks by insurgents have raised fears of a return to broader violence as U.S. troops end combat operations this month.

Osama al-Nujaifi, a senior member of Allawi's Sunni-backed Iraqiya, said Allawi had agreed to resume talks with Maliki's Shi'ite-led State of Law bloc after breaking off talks because Maliki described Allawi's group as Sunni, rather than cross-sectarian. [ID:nLDE67F1F2]

"Allawi received a letter the day before yesterday from Maliki regarding the last stand made by Iraqiya. I am not aware of the details of the letter but Allawi considers that the letter is sufficient to reconcile and overcome the situation," Nujaifi told Reuters.

Ali al-Dabbagh, a senior State of Law member, said he visited Allawi on Thursday to restart negotiations and handed him two proposals -- one on forming a coalition government and the second on political and administrative reform.

"We are seeking to bring together Allawi and Maliki in a private meeting to bring things back to its normal course and to have serious negotiations started between the two lists," Dabbagh told Reuters.

"We are making a new approach. It talks about creating an equation for partnership."

Allawi and Maliki have been locked in a tussle over who has the right to form the next government. Talks on working together began after Maliki failed to overcome resistance among many of his Shi'ite allies to his ambitions for a second term.

The political uncertainty has been accompanied by persistent attacks, eroding the hopes of many Iraqis that the ballot would lead to greater stability and prosperity in a country starved of investment after decades of war and sanctions.

Forming a government soon is critical to stability because the U.S. military ends its combat mission on Aug. 31. Its remaining 50,000 troops will play an advisory role to the Iraqi army and police ahead of a full withdrawal by end-2011.

Abdul-Mahdi al-Kerbalai, a representative of Iraq's most revered Shi'ite cleric, Grand Ayatollah Ali al-Sistani, urged all parties on Friday to put aside their differences and to not delay further in forming a government.

"We warn of serious and grave consequences and a reaction from the Iraqi people if the delay in forming a government continues. We warn them and say that the people are losing their patience," Kerbalai said in Friday prayers in Kerbala. (Additional reporting by Khalid al-Ansary; Writing by Serena Chaudhry; Editing by Michael Christie)