BAGHDAD: Iraq's Kurdistan has defended its oil policy with foreign companies and its crude trade barter with Turkey as constitutional, and rejected a initial deal between Baghdad and BP to develop an oilfield in the disputed city of Kirkuk.

The statement came after Iraq's oil minister told Reuters Baghdad's central government would sue companies exporting crude from Kurdistan, warned of cuts to autonomous region's federal budget and announced an accord with BP for Kirkuk oilfield.

Iraq's Arab-led central government and Kurdistan Regional Government or KRG run by ethnic Kurds are locked in a widening dispute over control of oil revenues, oilfields and territory that is fraying the country's uneasy federal union.

"Iraq's citizens are simply tired of this sort of language of threat and intimidation, which in the cynical pursuit of narrow political agendas serves only to create division and strife," the KRG said in a statement on its website.

"In terms of oil and gas management, the KRG firmly believes in, and abides by, the letter and spirit of Iraq's permanent, federal constitution."

Speaking to Reuters on Wednesday, Oil Minister Abdul Kareem Luaibi said Baghdad intends to sue Genel Energy - the first company to export oil directly from Kurdistan - and may slash the government's allocated 17 percent budget to the region unless it halts what he rejected as smuggling.

Luaibi announced a preliminary agreement with BP to revive the giant northern Kirkuk oil field, which - apart from being at the centre of the fight between Kurdistan and Iraq - is suffering massive output declines.

"He reveals details of an illegal and unconstitutional plan to allegedly allow BP to enhance the recovery of some of the depleted fields in Kirkuk... without consulting and obtaining approval of the other parties to the dispute," the KRG statement said.

The feud between Baghdad and the Kurdistan enclave, which has run its own regional administration and armed forces since 1991, has escalated since the KRG began signing oil deals with oil majors Exxon Mobil and Chevron to develop fields.

Iraq's government claims it alone has the constitutional authority to export crude oil and sign deals, but Kurdistan says the constitution allows it to agree to contracts and ship oil independently of Baghdad.