Islamic State fighters seized control of Iraq's biggest dam, an oilfield and three more towns on Sunday after inflicting their first major defeat on Kurdish forces since sweeping through the region in June.

Capture of the Mosul Dam after an offensive of barely 24 hours could give the Sunni militants the ability to flood major Iraqi cities, sharply raising the stakes in their bid to topple Prime Minister Nuri al-Maliki's Shi'ite-led government.

Islamic State, which sees Iraq's majority Shi'ites as apostates who deserve to be killed, also seized the Ain Zalah oil field, adding to four others already under their control, and three towns.



Read More

They faced strong Kurdish resistance only at the start of their latest offensive when taking the town of Zumar. The Islamists then hoisted their black flags there, a ritual that usually precedes mass executions of their captured opponents and the imposition of an ideology even al-Qaeda finds excessive.



The group, which has declared a caliphate in parts of Iraq and Syria, poses the biggest challenge to the stability of OPEC member Iraq since the fall of Saddam Hussein in 2003.



Since thousands of Iraqi soldiers fled the Islamic State offensive, Shi'ite militias and Kurdish fighters have been seen as a critical line of defense against the militants, who have threatened to march on Baghdad.



But Sunday's battles have called into question the effectiveness of the Kurdish fighters and have increased pressure on Iraqi leaders to form a power-sharing government capable of countering the Islamic State.



Little Resistance



Islamic State fighters attacked Zumar from three directions in pick-up trucks mounted with weapons, defeating Kurdish forces which had poured reinforcements into the town.



The Islamic State later also seized the town of Sinjar, where witnesses said residents had fled after Kurdish fighters put up little resistance against the militants.



On its Twitter site, the Islamic State posted a picture of one of its masked fighters holding up a pistol and sitting at the abandoned desk of the mayor of Sinjar. Behind him was the image of a famous Kurdish guerilla leader.



Read MoreExtremists in Iraq need a history lesson: ex-WH adviser

In a statement on its website, Islamic State said its fighters had killed scores of Kurdish fighters. "Hundreds fled leaving vehicles and a huge number of weapons and munitions and the brothers control many areas," Islamic State said. "The fighters arrived in the border triangle between Iraq, Syria and Turkey," it said.



Islamic State has systematically blown up Shi'ite mosques and shrines in territory it has seized, fueling levels of sectarian violence not seen since a 2006-2007 civil war.



However, the group, which changed its name earlier this year from the Islamic State in Iraq and the Levant (ISIL), has stalled in its drive to reach Baghdad, halting just before the town of Samarra, 100 km (62 miles) north of the capital.



Islamic State has been trying to consolidate its gains, setting its sights on strategic towns near oil fields, as well as border crossings with Syria so that it can move easily back and forth and transport supplies.



It has capitalized on Sunni disenchantment with Maliki.



Critics describe Maliki as an authoritarian leader who has put allies from the Shi'ite majority in key military and government positions at the expense of Sunnis, driving a growing number of the religious minority in Iraq to support the Islamic State and other insurgents. He is also at odds with the Kurds.



Independent state



The Kurds have long dreamed of their own independent state, an aspiration that has angered Maliki, who has frequently clashed with the non-Arabs over budgets, land and oil.



After the Islamic State arrived, Kurdish forces seized two oil fields in northern Iraq and took over operations from a state-run oil company, complicating the task of trying to hold the country together,



Read MoreAnd the buyer of the Kurdish crude oil is ...

In July, the Kurdish political bloc ended participation in Iraq's national government in protest over Maliki's accusation that Kurds were allowing "terrorists" to stay in Arbil, capital of their semi-autonomous region known as Kurdistan.



In another move certain to infuriate the Baghdad government, the Kurdish region is pressing Washington for sophisticated weapons it says Kurdish fighters need to push back the Islamist militants, Kurdish and U.S. officials said.



But Maliki needs the Kurds, who gained experience fighting Saddam Hussein's forces, to help defend his country from Islamic State, whose leader Abu Bakr al-Baghdadi has a $10 million U.S. bounty on his head.



Islamic State's ambitions have alarmed other Arab states who fear their success could embolden militants in their countries.



Islamic State fighters were among militants who clashed with Lebanese forces overnight in and around Lebanon's border town of Arsal. At least 10 Lebanese soldiers and an unknown number of militants and civilians died in the fighting, security officials said.



On Friday, Saudi Arabia's King Abdullah urged regional leaders and religious scholars to prevent Islam from being hijacked by militants.



— Reuters