BAGHDAD/KIRKUK, Iraq (Reuters) - Iraqi government forces captured the major Kurdish-held oil city of Kirkuk on Monday, responding to a Kurdish referendum on independence with a bold lightning strike that transforms the balance of power in the country.

A convoy of armored vehicles from Iraq’s elite U.S.-trained Counter-Terrorism Force seized Kirkuk’s provincial government headquarters on Monday afternoon, less than a day after the operation began, a Reuters reporter in Kirkuk said.

Neither side gave a casualty toll for the operation. But an aid group working in Kirkuk said several Kurdish Peshmerga fighters and Iraqi soldiers had been killed in an overnight clash south of the city - the only serious fighting reported.

As Iraqi forces advanced, Kurdish operators briefly shut some 350,000 barrels per day of oil output at two large Kirkuk fields, citing security concerns, oil ministry sources on both sides said. But production resumed shortly thereafter following an Iraqi threat to seize fields under Kurdish management if they did not do so, according to the sources.

It was not immediately clear whether or when the Iraqi government would seek to retake control of all Kirkuk oilfields, a vital source of revenue for the autonomous Kurdistan Regional Government (KRG).

The short suspension in production helped push up world oil prices as the shutdown represented more than half of total Kurdish output.[O/R]

A dozen Iraqi armored vehicles arrived at the provincial government headquarters in Kirkuk and took up positions nearby, alongside local police. They pulled down the Kurdish flag and left the Iraqi flag flying.

THOUSANDS OF KURDS FLEE

Thousands of Kurdish civilians fled the city of 1 million people for fear of reprisals. A Kurdish father of four who was driving out of Kirkuk towards the Kurdish regional capital Erbil to the north said: “We no longer feel safe. We hope to return to our home but right now we feel it’s dangerous for us to stay.”

Crowds of ethnic Turkmen who opposed Kurdish control of the city were celebrating. Some drove in convoys with Iraqi flags and fired shots in the air.

“This day should become a holiday, we’re so happy to have gotten rid of Barzani’s party,” said a man celebrating on a motorbike, waving the blue-and-white flag of Iraq’s Turkmen, referring to the Kurdish leader Masoud Barzani.

U.S. President Donald Trump told reporters at the White House that Washington would not take sides in the matter but “we don’t like the fact that they’re clashing.

“We’ve had for many years a very good relationship with the Kurds as you know and we’ve also been on the side of Iraq, even though we should have never been there in the first place.”

U.S. officials called for calm on both sides, seeking to avert an all-out conflict between Baghdad and the Kurds that would open an entirely new front in Iraq’s 14-year-old civil war and potentially draw in regional powers such as Turkey and Iran.

The Baghdad central government considers the Sept. 25 Kurdish independence referendum illegal, especially as it was held not just in the autonomous KRG region but in Kirkuk and other adjacent areas that Peshmerga forces occupied after driving out Islamic State militants in 2014.

The Peshmerga moved in after Iraqi government forces collapsed in the face of a rapid onslaught by Islamic State, preventing the jihadists from seizing the oilfields.

Iraqi Prime Minister Haidar al-Abadi ordered that the national flag be hoisted over Kirkuk and other disputed areas.

Baghdad described its army’s advance as largely unopposed, and urged the Peshmerga to cooperate in keeping the peace.

The Peshmerga said Baghdad would be made to pay “a heavy price” for triggering “war on the Kurdistan people”.

DECISIVE STEP AGAINST KURDISH SECESSION

The overnight advance was the most decisive step Baghdad has taken yet to block the independence bid of the Kurds, who have governed an autonomous tract of northern Iraq since the fall of Saddam Hussein in 2003 and voted three weeks ago to secede.

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Kirkuk, one of the most ethnically and religiously diverse cities in Iraq, is located just outside the autonomous Kurdish zone. Kurds consider it the heart of their homeland; they say it was cleansed of Kurds and settled with Arabs under Saddam to secure control of the oil that was the source of Iraq’s wealth.

Washington, which arms and trains both Iraqi federal forces and the Peshmerga to fight Islamic State militants, urged “all parties to immediately cease military action and restore calm”, according to a U.S. Embassy statement.

“ISIS (Islamic State) remains the true enemy of Iraq, and we urge all parties to remain focused on finishing the liberation of their country from this menace.”

U.S. Defense Department spokesman Colonel Robert Manning declined to speculate on whether Washington might cut off military aid and training to Iraqi forces in the event of a major conflict. “I’m not going to speculate on that but I will tell you that we’re looking at all options for planning considerations ... We encourage dialogue,” he said.

State TV said Iraqi forces had also entered Tuz Khurmato, a flashpoint town where there had been clashes between Kurds and mainly Shi’ite Muslims of Turkmen ethnicity.

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The “government of Abadi bears the main responsibility for triggering war on the Kurdistan people, and will be made to pay a heavy price”, the Peshmerga command said in a statement, cited by Kurdish leader Barzani’s assistant Hemin Hawrami.

SECESSION OPPOSED BY NEIGHBORS

The Kurdish secession bid was strongly opposed by neighbors Iran and Turkey. Washington, allied with the Kurds for decades, pleaded vainly for them to halt a vote that could break up Iraq.

There were signs of internal strife among the Kurds, who have been divided for decades into two main factions, the KDP of regional government leader Barzani and the PUK of his longtime rival Jalal Talabani, who served as Iraq’s ceremonial president in Baghdad from 2003-2014 and died two weeks ago.

Both Kurdish parties control their own Peshmerga units. While Barzani’s KDP strongly supported the independence referendum, some PUK figures were more circumspect.

Monday’s Peshmerga statement accused a group within the PUK of “treason” for allegedly assisting Baghdad’s advance. “We regret that some PUK officials helped in this plot,” it said.

Talabani’s widow, Hero, said the Iraqi operation was carried out with international consent and the PUK was not able to prevent it through talks. “This heroic city was facing an international plan,” she said in a statement.

“The past few days have been spent in meetings with American representatives, representatives of the Iraqi government and ... of various other countries in order to prevent today’s attack. “It is with great regret that we were not successful on this occasion.”

Although Iraqi officials portrayed the Kurds as retreating without a fight, Kurdish officials said Peshmerga had clashed with the “Popular Mobilisation” - Shi’ite Muslim forces trained and armed by Iran that operate alongside regular Iraqi troops.

Turkey, which had developed a good working relationship with the Iraqi Kurds and let the landlocked region export oil through its pipes, has swung behind Baghdad, furious at a secession move that might ignite similar demands from its own Kurds.

Turkey said on Monday it would close its air space to KRG territory and work to hand control of the main border crossing into the region to the Iraqi central government.