Iraqi forces seized a key military base, an airport and an oil field from Kurdish fighters on Monday in disputed Kirkuk province in a major operation sparked by a controversial independence referendum.

The offensive, which follows weeks of soaring tensions between two US allies in the battle against the militant Islamic State (IS) group, aims to retake oil and military sites that Kurdish forces took over during the fightback against the fighters .

Thousands of residents were seen fleeing Kurdish-controlled Kirkuk city, according to an AFP journalist.

Iraqi and Kurdish peshmerga forces exchanged artillery fire early Monday south of the capital of the oil-rich province, after the launch of the operation overnight which triggered a spike in oil prices on world markets.

But after the initial clashes Iraqi forces made rapid progress, suggesting Kurdish fighters were withdrawing with little or no resistance.

Iraq's Joint Operations Command said its forces had retaken the K1 military base northwest of Kirkuk, the military airport east of the city and the Baba Gargar oil field, one of six in the disputed region.

The operation follows an armed standoff between Kurdish forces and the Iraqi army prompted by the September 25 non-binding referendum that produced a resounding “yes” for independence for the autonomous Kurdish region of northern Iraq.

Baghdad has declared the vote ─ held despite international opposition ─ illegal.

Crisis talks on Sunday had made little headway in resolving the standoff, which has raised fears of fresh chaos just as IS jihadists are on the verge of losing their last strongholds in the country.

Iraqi Prime Minister Haider al-Abadi said the operation was necessary to “protect the unity of the country, which was in danger of partition” because of the referendum.

“We call upon all citizens to cooperate with our heroic armed forces, which are committed to our strict directives to protect civilians in the first place, and to impose security and order, and to protect state installations and institutions,” he said.

An AFP photographer saw columns of Iraqi troops heading towards Kirkuk from the south.

Multiple peshmerga fighters were injured in the initial clashes and hospitalised in Kirkuk, a local security source said.

But peshmerga forces loyal to the Patriotic Union of Kurdistan (PUK), a political party linked to Iraqi President Fuad Masum, who is himself a Kurd, were later reported to be withdrawing from areas under their control.

Pro-PUK forces were deployed south of the city, including at oil fields, while fighters loyal to the rival Kurdistan Democratic Party (KDP), linked to Iraqi Kurd leader Massud Barzani who initiated the referendum, were deployed to the north.

Two people were killed in artillery exchanges at Tuz Khurmatu, 75 kilometres south of Kirkuk, a doctor at a city hospital said.

'Declaration of war'

On Sunday, Iraq's National Security Council said it viewed as a “declaration of war” the presence of “fighters not belonging to the regular security forces in Kirkuk”, including fighters from Turkey's outlawed Kurdistan Workers' Party (PKK).

For their part, the Iraqi forces have said that they have no wish to enter Kirkuk but that they wish to retake military positions and infrastructure which were under their control before their troops withdrew in the face of hostility from the militants.

On the fringes of the town, they used loudspeakers to call on the peshmerga to give up their positions, local sources said.

Long claimed by the Kurds as part of their historic territory, the province has emerged as the main flashpoint in the dispute.

Polling during the referendum was held not only in the three provinces of the autonomous Kurdish region but also in adjacent Kurdish-held areas, including Kirkuk, that are claimed by both Baghdad and Iraqi Kurdistan.

The Kurds have been in control of six fields in the Kirkuk region providing some 340,000 of the 550,000 barrels per day exported by the regional administration.

The fields would provide crucial revenue to Baghdad, which has been left cash-strapped from the global fall in oil prices and three years of battle against IS.

US calls for dialogue

As Iraqi forces launched their operation to reclaim part os Kirkuk, the US-led coalition battling IS urged Baghdad and Iraq's Kurds to “avoid escalation actions”.

“We continue to advocate dialogue between Iraqi and Kurdish authorities. All parties must remain focused on the defeat of our common enemy, ISIS, in Iraq,” Major General Robert White, a commanding general in the coalition, said in a statement.

The coalition said it was monitoring movements of military vehicles and personnel in the vicinity of Kirkuk and denied that a wide-scale offensive was underway.

“These movements of military vehicles, so far, have been coordinated movements, not attacks,” the statement said.

It said coalition forces were not supporting activities by the Iraqi or Kurdish governments around Kirkuk.

The coalition was aware of reports of clashes, it said. “We believe the engagement this morning was a misunderstanding and not deliberate. “