BAGHDAD (Reuters) - Iraq’s government has lost control of vast areas to powerful local factions and the country is on the verge of collapse and fragmentation, a leading British think-tank said on Thursday.

A protester chants slogans near burning tyres during a demonstration in Basra, 550 km (340 miles) south of Baghdad May 16, 2007. Iraq's government has lost control of vast areas to powerful local factions and the country is on the verge of collapse and fragmentation, a leading British think-tank said on Thursday. REUTERS/Atef Hassan

Chatham House also said there was not one civil war in Iraq, but “several civil wars” between rival communities, and accused Iraq’s main neighbors -- Iran, Saudi Arabia and Turkey -- of having reasons “for seeing the instability there continue.”

“It can be argued that Iraq is on the verge of being a failed state which faces the distinct possibility of collapse and fragmentation,” it said in a report.

“The Iraqi government is not able to exert authority evenly or effectively over the country. Across huge swathes of territory, it is largely irrelevant in terms of ordering social, economic and political life.”

The report also said that a U.S.-backed security crackdown in Baghdad launched in February has failed to reduce overall violence across the country, as insurgent groups have just shifted their activities outside the capital.

While cautioning that Iraq might not ultimately exist as a united entity, the 12-page report said a draft law to distribute Iraq’s oil wealth equitably among Sunni Arabs, Shi’ites and ethnic Kurds was “the key to ensuring Iraq’s survival.”

“It will be oil revenue that keeps the state together rather than any attempt to build a coherent national project in the short term,” the influential think-tank said.

The oil law, among benchmarks Washington has set Baghdad as critical steps to end sectarian violence, has yet to be approved by parliament. Ethnic Kurds, whose autonomous Kurdistan region holds large unproven reserves, oppose the draft’s wording.

Rather that one civil war pitting majority Shi’ites against Sunnis nationwide, the paper said Iraq’s “cross-cutting conflicts” were driven by power struggles between sectarian, ethnic and tribal groups with differing regional, political and ideological goals as they compete for the country’s resources.

The author of the report, Middle East expert Gareth Stansfield, said instability in Iraq was “not necessarily contrary to the interests” of Iran, Saudi Arabia and Turkey.

“(Iraq) is now a theatre in which Iran can ‘fight’ the U.S. without doing so openly,” Stansfield said, adding that Iran was the “most capable foreign power” in Iraq in terms of influencing future events, more so than the United States.

The rise to power of Iraq’s long-oppressed Shi’ite majority has caused concern in Sunni Gulf states, particularly Saudi Arabia, which deeply distrusts non-Arab, Shi’ite Iran’s influence in Iraq, Stansfield wrote.

Should a U.S. withdrawal herald the beginning of a full-scale Sunni-Shi’ite civil war in Iraq, Saudi Arabia “might not stand by,” the paper said, “with the possibility of Iran and Saudi Arabia fighting each other through proxies in Iraq”.