Irked by Iraq's close ties to neighbouring Iran, Washington has begun following through on threats to squeeze Baghdad's fragile economy with delays to crucial cash deliveries and shortened sanctions waivers.

In recent days, the United States granted Iraq last-minute leave to import Iranian gas for its crippled power grids, despite American sanctions on Tehran, but Washington's patience seems to be running out; the latest waiver was reduced from the usual 90 or 120 days to 45 days.

"This is the beginning of death by a thousand cuts," warned financial analyst Ahmed Tabaqchali of the Institute of Regional and International Studies in Iraq. "The shorter the waiver, the more we can't afford for things to go wrong in that time."

Iraq is at a crucial crossroads. Its new prime minister is struggling to form a cabinet, anti-government protests are filling the streets and skyrocketing tensions between its two main allies -- Tehran and Washington -- have spilt blood on its territory.

While Iran enjoys tremendous political and military sway in Iraq, the United States still holds a major trump card -- the economy.

Every month or so, the Central Bank of Iraq flies in $1 billion-$2 billion in cash from the Federal Reserve in New York, where all its oil revenues are kept, to pay for official and commercial transactions.

The expected mid-January shipment was more than a week late, a top Iraqi official and an oil industry source said, citing "political reasons" for the White House decision.

"We are on a knife's edge," the Iraqi official said.

It was the first sign Washington may follow through on a threat to block Iraqi access to its money were Baghdad to oust the 5,200 US troops stationed in Iraq. That was the Iraqi parliament's response to a US strike on Iraqi soil that killed a top Iranian commander and an Iraqi paramilitary chief.

Washington has considered blocking the funds to pressure Iraq for months, a senior US diplomat in Baghdad said, describing it last year as "the nuclear option."

While February's dollars arrived on time, Iraqi officials said they expect Washington to start restricting how much cash Baghdad can bring in. Losing access to its funds would have devastating ramifications for Iraq, whose economy relies almost entirely on oil exports paid with dollars.

If the sanctions waiver expires, Iraq would have to either stop buying Iranian gas and face sweeping power cuts or keep importing and risk US sanctions itself. As it is, Iraq's power cuts can last up to 20 hours a day.

Washington has tied sanctions to other issues, including the nearly 20 rocket attacks since October on the US Embassy in Baghdad and Iraqi bases hosting US troops.

An Iraqi official said US Secretary of State Mike Pompeo "yelled" at outgoing Iraqi Prime Minister Adel Abdul-Mahdi in a phone call in January. "He told him to forget talks over a waiver renewal if the attacks continue," the official said.

In a sign of worsening ties between Washington and Baghdad, Pompeo did not meet with Iraqi Foreign Minister Mohamed al-Hakim during the recent Munich Security Conference. Pompeo, as well as the US secretaries of defence and energy, met with the prime minister of the autonomous Kurdish region, Masrour Barzani, instead.

The United States is also irritated by Iraq's slow progress in signing deals with major US energy firms and weaning itself off Iran.

"(Iraqis) have continuously rejected the deals with GE and Exxon," a senior administration official said, weeks before the recent waiver expired. "They are choosing to be dependent on the Iranians, giving (Tehran) a chokehold on their economy and infrastructure."

Iran, which has long sought to curb US influence across the region, is the second-largest exporter of goods to Iraq but the United States dwarfs it in terms of direct investment, particularly in the vital oil sector and infrastructure.

Sources in Baghdad and Washington described a split in US policy, with the White House willing to ramp up pressure on Iraq while others argued for flexibility. Hardliners were becoming "dominant," they said, and one Iraqi official described them as "transactional bullies."

After the waiver renewal, Iraqi Electricity Minister Luay al-Khatteeb said Washington must not "corner Iraq."

"I am confident the US will not weaponise these waivers to compromise public services," he said.

Khatteeb cited signs of progress -- deals already signed with Jordan and the Gulf for cross-border grids and possible gas purchases from the autonomous Kurdish region. Three weeks before the waiver expired, Iraq's caretaker cabinet green-lighted six gas contracts to boost power generation.

"That announcement was a response to growing American pressure. You can see the Iraqi government panicked," said Tabaqchali.

However, the United States could find itself with little leverage other than "economic-based threats," said Ramzy Mardini of the US Institute for Peace.

"That approach may work to secure US interests in the short term but the overall bilateral relationship will remain severely impaired by distrust and animosity," he said.

(AFP)