Residents look at the site of a car bomb attack in Baghdad Thomson Reuters BAGHDAD (Reuters) - Residents of a town north of Baghdad found 12 corpses with execution-style bullet wounds on Monday, after fighting between rival Sunni insurgent groups that could eventually unravel the coalition that seized much of the north and west of the country.

The incident points to an intensification of infighting between the Islamic State and other Sunni groups, such as supporters of former dictator Saddam Hussein, which rallied behind the al Qaeda offshoot last month because of shared hatred for the Shi'ite-led government in Baghdad.

Police in Muqdadiya, a town 80 km (50 miles) northeast of the capital, said residents from the nearby town of Saadiya found the 12 corpses on Monday after intense fighting overnight between Islamic State fighters and the Naqshbandi Army, a group led by Saddam allies.

Since the Islamic State swept through Iraqi cities and proclaimed its leader caliph of all Muslims last month, there have been increasing signs of conflict with other Sunni groups who do not necessarily share the al Qaeda offshoot's rejection of Iraq's borders or its severe interpretation of Islam.

Washington, which recruited other Sunni fighters to defeat al Qaeda during the U.S. surge offensive in 2006-2007, hopes other Sunnis will again turn against the Islamic State and can be lured back into a power-sharing government in Baghdad.

The White House has pressed for an inclusive government in Baghdad, but so far Shi'ite Prime Minister Nuri al-Maliki has ignored calls from Sunnis and Kurds to step down in favor of a less polarizing figure who would allow Sunnis a greater voice.

Saadiya, a mostly Sunni town, was overrun by Islamic State militants on June 10, the same day the city of Mosul fell to the insurgents. It is located in Diyala, a mainly rural province north of Baghdad where lush irrigated fields have long sheltered armed groups that resent the arrival of outsiders.

Residents say the town is a stronghold of Naqshbandi Army fighters who supported the Islamic State when it first swept into the area, but have since clashed with the group.

A doctor in the Baquba morgue, where the corpses were taken, said the men all bore bullet wounds to their heads and chest, though there was no sign of torture. He said the men had been dead no more than 24 hours.

The people who found the bodies said the men were Naqshbandi fighters in their 20s and 30s, and blamed the Islamic State for the execution-style killings. The Saadiya residents brought the corpses to police in Muqdadiya because the police in their town fled on June 10 when the insurgents swept in.

Local government official Ahmad al-Zarghosi, who also fled, told Reuters that he estimated 90 percent of the town had fled north. Zarghosi, speaking from the town of Khanaqin, said fighting had been raging for a week between Naqshbandi locals and the Islamic State militants.

Though locals said the Naqshbandi Army enjoys strong support in Saadiya, the Islamist militants are far better equipped. They have been seen with heavy weapons and military vehicles including Humvees in towns they seized last month, equipment apparently taken from the army which received billions of dollars worth of U.S. hardware in recent years.

Infighting between Sunni insurgents could doom their bid to reach Baghdad, as well as prospects for consolidating control under the Islamic State's black flag in regions they have taken.

Though the Islamic State, then known as the Islamic State in Iraq and the Levant (ISIL), spearheaded last month's offensive, it relied on support from fellow Sunnis eager to drive out forces loyal to Maliki's Shi'ite-led government.

A key ally for ISIL was the Naqshbandi Army, believed to be led by Ezzat Ibrahim al-Douri, Saddam's former deputy and the only top member of the dictator's entourage still at large since the 2003 U.S.-led invasion that toppled him.

An audio recording of Douri's voice surfaced on a website loyal to Saddam's ousted Baath Party on Saturday night with a message heaping praise on the al Qaeda offshoot, although apparently acknowledging divisions among insurgent ranks. The authenticity of the recording cannot be verified.

Iraq's national army and allied Sh'ite militias have been fighting the Islamic State for days over a military base next to Muqdadiya and trading control of nearby town of Sadur, which Maliki's military spokesman said Sunday the army had retaken.

SADDAM-ERA COLONEL KILLED

The spokesman, Lieutenant General Qassim Atta, said on Sunday the army had also seized back the nearby village of Nawfal after days of fighting.

In that village, Nasqhbandi fighters and the Islamic State are still fighting together against government forces. Seven Naqshbandi members were killed on Monday during a battle against government forces and Shi'ite militias, police said.

The dead included Saddam-era army colonel Hussein al-Mehdawi, who was fighting alongside the Islamic State, and six of his relatives.

Elsewhere in Diyala province, police in the provincial capital Baquba reported 12 kidnappings overnight. Details were not immediately clear. The mostly Sunni city was the site of a mass killing at a jail last month that victims' families blamed on government forces and allied Shi'ite militias.

Though the front line has yet to reach Baghdad, frequent bomb attacks are striking the capital. Three separate explosions occurred before nightfall on Monday, killing at least eight people and wounding more than 20.

(Additional reporting by Kareem Raheem in Baghdad; Editing by Dominic Evans and Peter Graff)