The tribal chiefs, in traditional robes and chequered headdresses, emerged from the dust stirred up by their convoy of pick-up trucks and walked towards the big white tent, gesturing welcomes to each other as they sat.

Accompanied by about 500 clansmen and a gaggle of local journalists, the 35 Sunni sheikhs - from Mosul, Tikrit, Samarra and Hawija - converged last week on Hindiya, on the scrappy western edges of Kirkuk, to swear their undying opposition to "conspiracies" to partition Iraq and to pledge allegiance to their president, Saddam Hussein.

Under banners exalting the man now standing trial in Baghdad for war crimes and genocide, the gathering heard speeches from prominent northern Iraqi sheikhs, Sunni Arab politicians and self-declared leaders of the Ba'ath party calling for the former dictator's release.

"If the Iraqi government wants national reconciliation to succeed and for the violence to end, they have to quickly release the president and end the occupation," said Sheikh Abdul Rahman Munshid, of the Obeidi tribe. "But most important of all," he added, "Kirkuk must never become part of Kurdistan. It is an Iraqi city, and we will take all routes to prevent the divisions of Iraq."

The heated debate about federalism in Iraq is no better exemplified than in Kirkuk. Though largely free of the sectarian wars taking place in Baghdad and its surrounding area, observers say the ethnic faultlines running through the city, which lies atop Iraq's second largest oilfield, make it a ticking time bomb that could pit Kurd against Arab and draw in neighbours such as Iran and Turkey.

"There are few more sensitive issues in Iraq today than what happens to Kirkuk," said a western diplomat in Iraq who works closely with the issue. "All eyes are on it, and all the ingredients for either consensual agreement or a devastating discord are there. If Kirkuk survives, then there's hope for Iraq."

As if to reinforce that message, within hours of the Sunni gathering a wave of suicide bombs rocked Kirkuk's city centre, including one in a crowded market and another in front of a women's teaching college. At least 15 civilians were killed and scores wounded.

Despite the oil riches that lie beneath, above ground Kirkuk appears a forlorn and neglected city. Street after street consists of humble two-storey dwellings with barely a modern building in sight. Litter is strewn everywhere, and there are huge queues at the petrol pumps. The tumbledown shops and market stalls in the centre of the city sell cheap consumer goods from Iran and Turkey.

The city's ancient citadel lies in ruins. The governor, Abdul Rahman Mustapha, a Kurd, blames the dilapidated state of the city on years of Ba'athist misrule. Neither does he have a good word for the current government in Baghdad. "They have ignored us and set so many obstacles in the path of our progress and reconstruction," he said.

Only now, three years after the end of the war, is money beginning to filter through for much-needed infrastructure work. In partnership with the US Provincial Reconstruction Team (PRT) and US Army Corps of Engineers (USACE), the provincial government has undertaken projects to provide fresh water to the mostly Arab south of the city, as well as garbage collection and treatment and the renovation of schools.

"A good sign is that Kurds, Turkomans and Arabs still eat in the same restaurants, and mix together," said Mr Mustapha. Yet, as with so many other of Iraq's major cities, the trauma of history is close to the surface. Throughout the 1980s and 1990s the Ba'ath party systematically drove out as many as 200,000 Kurds and Turkomans from urban and rural Kirkuk to weigh the city's ethnic balance towards the Arabs and ensure strategic control of the oil fields.

After the fall of Saddam's regime, thousands of Kurds returned to the city, demanding the restitution of their land and property and the right to vote for Kirkuk to join the Kurdish autonomous region in the north. The Iraqi constitution promises to remove Arab settlers, who would receive compensation, and return Kurds to Kirkuk - an explosive issue for many non-Kurds.

"It will be disastrous," said Ali Mehdi, a Turkoman member of the provincial council. "The people won't accept the rule of the Kurdish parties. A civil war could break out any minute." He said Kirkuk should achieve special independent status unallied to any regional blocs.

Kurdish leaders insist, however, that they are neither after ethnic supremacy nor Kirkuk's oil, which could give them an economic base for future independence. Instead they are seeking to right historical wrongs.

"We want to see the issue resolved in a legal and peaceful way, as designated in the constitution," said Fuad Hussein, a senior aide to the Kurdish president Massoud Barzani. "Kirkuk is historically part of Kurdistan, but we will make sure it is well-run and safe for everyone regardless of race or religion."

But he expressed dismay at the Sunni leaders' meeting. "Ba'athists meeting openly under the nose of Americans is not a good sign for the future," he said.

Relatively peaceful in the first two years after the fall of Saddam - defying observers who said civil war would start here - Kirkuk is witnessing an alarming increase in bloodshed as the political tensions rise. The wave of violence is terrifying residents and testing to the limit the fragile relations among its Kurdish, Arab and Turkoman residents.

The US military in Kirkuk says the city has been hit by 20 suicide bombs and 63 roadside bombs in the past three months. Local police and community leaders have been assassinated and politicians attacked. This despite a series of security sweeps by US and Iraqi forces and the digging of a large trench ringing Kirkuk's southern approaches, designed to funnel traffic into the city through official Iraqi army checkpoints.

Colonel Patrick Stackpole, who commands 5,000 US troops in a province of about one and a half million people, said the "violence is mainly by outsiders, though undoubtedly they have facilitators inside the city". "Jihadis from east and west, belonging to groups such as Ansar al-Islam and Ansar al-Sunnah, are targeting the city, trying to stoke civil war," he said. "But there's also a large element of former regime loyalists who don't want the city to succeed."

Nevertheless, he described himself as "guardedly optimistic" and offered rare praise for the province's security forces. "They are taking over more and more functions, leading operations, and performing more effectively without the scale of problems of corruption and disloyalty seen in other forces in Iraq," he said. "We haven't seen death squads."