London, September 29 2004 - Iraq's oil-rich southern provinces are considering plans to set up an autonomous region - a move that reflects their growing frustration with the central government in Baghdad.

Members of the municipal council of Basra, Iraq's second largest city, have been holding talks with officials from councils in two neighbouring provinces on establishing a federal region in the south, following the example of the Kurdish north. The three provinces - Basra, Missan and Dhiqar - account for more than 80 per cent of the proved oil reserves of the country's 18 provinces and provide a large share of the national income.

The talks are a political challenge to the embattled interim Iraqi government which is fighting a fierce insurgency in Sunni Arab areas, continued unrest in an impoverished Shia suburb of Baghdad and militant gangs bent on disrupting the country's reconstruction.

Diplomats familiar with the talks say the three provinces have felt marginalised in new government institutions, including the consultative assembly, and believe they are not receiving a fair share of economic resources. The cabinet led by Iyad Allawi, the prime minister, includes only one representative from the three provinces.

"The south has been desperately disappointed and they see Baghdad as continuing to leave them without representation," said a western diplomat. "So they are working on ways to organise themselves to have more clout with the centre."

Walid Khadduri, editor of the Cyprus-based Middle East Economic Survey, and an expert on Iraq, said the talks on self-rule were alarming. "It could weaken the state and lead to the eventual fragmentation of the country."

Part of the problem stems from the powers given to local governments by the US occupation authorities before the transfer of sovereignty to Iraq this summer. In order to regain some of these powers, Mr Allawi's government is said to be giving military commanders in the south more civilian authority.

Since the end of the Iraq war, the US and, more recently, the Allawi government, have struggled to reconcile the competing demands of the majority Shias and the minority Sunni Arabs and Kurds. The government has sought to quell a popular Sunni insurgency by giving greater representation to Sunni Arab tribes. It also has tried to maintain the support of Iraq's Shia majority by addressing the demands of Grand Ayatollah Ali Sistani, the highest-ranking Shia cleric in the holy city of Najaf, who has insisted on early elections.

The Kurdish minority, whose leaders are long-time US allies, has been held in check by the promise of a large measure of autonomy when a permanent constitution is drafted after the January elections.

The three provinces, however, have felt left out, and are demanding that their local representatives, rather than the Shia clergy in Najaf, speak for them.

"In the south people feel Najaf and Karbala [Iraq's second Shia holy city] look down on them as second-class citizens and they would not do better under them any more than under the Sunnis," said a western diplomat.

But people close to the Iraqi government say some officials driving the autonomy talks are backed by Muqtada al-Sadr, the renegade Shia cleric who launched an uprising against American troops in July.

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