By Ahmed Rasheed

BAGHDAD, Sept 5 (Reuters) - Iraq's Oil Ministry has cutsupplies of some fuel products to the northern Kurdish region by50 percent in response to the Kurds selling what they say isexcess kerosene, fuel waste and naptha to Iran, officials said.

The move threatened to aggravate already tense relationsbetween Iraq's minority Kurds and the Arab-led government inBaghdad, at a time when U.S. forces which have acted as a bufferbetween the two since the 2003 invasion are starting to leave.

The decision to cut supplies to the semi-autonomous KurdishRegional Government was ordered by Oil Minister Hussainal-Shahristani, Oil Ministry documents obtained by Reutersshowed.

"Based on instructions from the oil minister, it was decidedto cut the allocation of kerosene and diesel fuel sent toprovinces in the Kurdish region by 50 percent until furthernotice," one document said.

An Oil Ministry official who declined to be named said thedecision was taken in response to an acknowledgement last monthby Kurdish natural resources minister Ashti Hawrami that theregion was selling surplus oil products to private companies.

Those private companies were exporting the products throughneighbouring Iran, a challenge to U.S. efforts to imposesanctions on Iran.

The exports have put further strains on Kurd-Arab relations.

Shahristani has said any exports of crude oil would beillegal because the law only allows the State Oil MarketingOrganisation to sell crude abroad. But he has also complainedabout the resale of refined products because Iraq does notproduce enough to be self-sufficient and has to import.

NEW OIL FIELDS

"The Kurdish regional government is allowing the illegalexport of refined products to take place while the federalgovernment has to spend millions importing refined fuels becauseof a shortfall," the Oil Ministry official said.

Kurdish officials condemned the decision to restrictkerosene and diesel supplies to their region, and said theywould make every effort to ensure fuel prices did not rise.

"The decision to cut fuel supplies is unjust and we will doour best to stop any negative implications," Serwan Abu Bakir, asenior official at the Kurdish natural resources ministry, toldReuters on Sunday.

Iraqi Kurdistan and Baghdad have been at loggerheads formonths over oil deals the Kurds signed independently withforeign firms. The Arab-led government in Baghdad refuses to paythe firms, and oil exports from Kurdistan stopped last year.

Baghdad's hand has been strengthened by a series of deals todevelop oilfields outside the Kurdish region that could turnIraq into one of the world's top three crude producers. That hasmade the government feel less dependent on potential revenuesfrom the export of Kurdish oil.