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ANALYSIS-Iraq traumatised and divided six years on

BAGHDAD, March 17 (Reuters) - Six years after U.S. missiles lit Baghdad's skies in the opening salvo of the Iraq war, the increasingly rare sight of U.S. vehicles rumbling down the capital's dusty streets signals U.S. forces' coming withdrawal.

The announced end to the U.S.-led occupation overshadows everything in today's Iraq, where a government beset by rivalries struggles to put a stop to violence that has killed tens of thousands and displaced 4.7 million people since 2003 and to piece together an economy and society shattered by war.

Washington's plan to withdraw all troops by 2012 focuses attention on whether Iraq can prevent violence from flaring anew and whether it can defuse explosive feuds over oil and power.

Hazim al-Nuaimi, a political analyst in Baghdad, said the six years after the toppling of Saddam Hussein's had been traumatic for Iraq's economy, its political conflicts and the security of its people.

"The only thing that has changed is that now there's a light at the end of the tunnel. But it seems six years is not enough to be able to reach that light," he said.

After years of catastrophic bloodshed in which bodies piled up on Baghdad sidewalks by the dozen each day, violence in Iraq has fallen to its lowest level since late summer 2003.

U.S. officials credit the drop to the 2007 surge of troops into Iraq, cooperation from Sunni tribal leaders fed up with al Qaeda's brutal tactics, and the government's growing confidence.

Prime Minister Nuri al-Maliki, once seen as weak, emerged as a strong leader after battling Shi'ite militias last year, and he is now credited by many Iraqis for sharply improved security.

But places like Mosul in northern Iraq, where Sunni militants have survived years of attack, remain gripped by daily violence. And across Iraq, militants can still stage large-scale attacks.

Just this month, more than 60 people were killed in major suicide bombings in Baghdad in the space of three days.

SECTARIAN GENIE OUT OF BOTTLE

People like analyst Ghassan al-Attiyyah blame the United States for stoking sectarian and ethnic killing as they sought in the early days to empower majority Shi'ites sidelined under Saddam's Sunni-led regime and to forge a government that represented the majority.

"They failed to understand Iraq. They made great mistakes, basically enhancing divisions among Iraqis," said Attiyyah, who heads the Iraq Foundation for Democracy and Development.

Today, the U.S. military approach is seen as more adroit, based more on community outreach and tutoring increasingly competent, though far from independent, local forces rather than using sheer force. But some say it's far too late.

"The genie was let out of the bottle, and society is now polarised between sectarian and ethnic forces," Attiyyah said.

Following a major success in January's local elections, Maliki has stepped up his calls for reconciliation among Iraq's rival factions, including forgiveness for allies of Saddam.

Some doubt Maliki's sincerity. There are warnings, notably from northern Iraq where minority Kurds have enjoyed relative autonomy, about the risks of a more powerful leader in Baghdad.

As insurgent violence subsides, a major threat is seen in growing tension between Maliki and the Kurds, who are adamant in their demands on oil resources and disputed border areas.

"Over the last couple of months, you've seen fewer attempts to try to bridge the (Kurd-Arab) gap, and some attempts to try to burn bridges," a U.S. official in Baghdad said.

The depth of such divisions is evident in the stalemate over control of the city of Kirkuk, which Kurds claim as an ancestral homeland despite objections from the city's Turkmen and Arabs.

The United Nations is seeking a compromise, but there is no sign that either side will back down. Kurd-Arab feuds have also stalled a new national oil law, whose passage is seen by would-be investors as a green light for putting capital in Iraq.

NATIONAL POLLS A MAJOR TEST

Such tensions underscore the challenges facing Iraq in marshalling political unity before late 2009 national polls that will be a test of how this young democracy can be sustained.

"2009 should not be frittered away at politicking and conspiring. The risk for 2009 broadly is that's what might happen," one western diplomat said on condition of anonymity.

Key to deterring more violence is reviving an economy crippled by war, isolation, poor planning under Saddam and an unrealistic attempt to create free market laboratory conditions under the occupation.

"Before the invasion the economy was 100-percent state controlled. After 2003 and (U.S.) directives, it became a fully free market one, with no transition," said economist Abdul Rahman al-Mashhadani of Baghdad's al-Mustansiriya University.

Maliki's government is soliciting bids for major oil and gas contracts, and international oil firms are already diving into a number of major projects in Iraq's lucrative oil sector.

Iraq has the world's third largest oil reserves, but the industry is hamstrung by bureaucracy, just as are other sectors where growth and investment is has yet to materialise.

"Unless there is an administrative revolution in the oil sector, the situation will remain as it is," former Oil Minister Ibrahim Bahr al-Uloum said. (Additional reporting by Ahmed Rasheed; Editing by Samia Nakhoul)

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