Iraqi government spokesman Ali al-Dabbagh said 11 Iranian soldiers had taken control of the Fakka oilfield in a remote desert area of southeastern Iraq, in a violation of Iraqi sovereignty.
Iraq demands the immediate withdrawal from well No. 4 and the Fakka oilfield, which belongs to Iraq. Iraq is looking for a peaceful and diplomatic settlement to this issue, he said.
Dabbagh did not give a deadline for withdrawal and did not say what Iraq would do if Iran failed to comply. Officials have summoned Tehran's envoy in Iraq to discuss the matter, he said.
Iraqi officials said the Iranian soldiers crossed into Iraqi territory on Friday and raised the Iranian flag at Fakka, whose ownership is disputed by Iran.
Iraqi Deputy Interior Minister Ahmed Ali al-Khafaji said the incursion was the latest of several this week at the field, some 300 km (185 miles) southeast of Baghdad in Maysan province.
At 3:30 this afternoon, 11 Iranian (soldiers) infiltrated the Iran-Iraq border and took control of the oil well. They raised the Iranian flag, and they are still there, he said.
Iran's semi-official Mehr news agency later quoted the National Iranian Oil Company (NIOC) as rejecting the report.
The company denies Iranian soldiers taking control of any oil well inside Iraqi territory, Mehr quoted the NIOC as saying.
Khafaji said the well was in Iraqi territory.
This well is located on Iraqi land, 300 meters (yards) inside Iraq. It is disputed between Iran and Iraq. There was an agreement between the two countries' oil ministers to fix this problem diplomatically, he said.
A senior engineer from Maysan Oil Company, which operates the field, said Iranian troops had taken temporary control of one of the field's seven wells, an inoperative well in a disputed border area, four or five times this year.
Iranian forces come to this well periodically, and then at daybreak they withdraw. They are provoking us ... I don't know why this is a big deal this time, he said, on condition of anonymity.
OIL PRICE RISES
The benchmark U.S. light crude oil future moved to a high of $74.69 per barrel at 9:14 a.m. EST (1414 GMT), up from $73.31 at 6:08 a.m. EST (1108 GMT) before the first reports, and was $74.07 at 1:46 p.m. EST (1846 GMT).
The incident came a few days after the Iraqi Oil Ministry awarded leading global energy firms contracts to operate seven oil fields in its second tender since the 2003 U.S. invasion.
Iraq, whose oil sector is scarred by years of sanctions and war, says such deals may eventually lift capacity to 12 million barrels per day, putting it nearly on par with Saudi Arabia and far above Iran's output of around 4 million barrels per day.
But as U.S. troops prepare to withdraw by 2012, foreign firms must grapple with persistent violence, political feuds and legal uncertainties dogging large-scale investments.
The government has been struggling to respond to a spate of attacks, the last of which killed up to 112 last week in Baghdad, aimed at destabilizing Iraq ahead of March 7 elections.
Ties between Iraq and neighboring Iran, which fought an eight-year war in the 1980s, have improved since a Shi'ite-led government took over in Baghdad following the ousting of Sunni Arab leader Saddam Hussein in 2003.
Yet relations are tested in areas like eastern Maysan, just one of many flashpoints of continuing disagreement over shared borders between the majority Shi'ite Muslim neighbors.
The bilateral relationship is all the more delicate given Washington and Tehran's standoff over Iran's nuclear program and the presence of 115,000 U.S. soldiers on Iraqi soil.
U.S. officials said they were aware of the border incident but there were no U.S. forces in the area.
Iraqi Interior Minister Jawad al-Bolani told al-Arabiya TV: Iraq will not give up its oil wealth, no matter the reason.
With Bazargan and Abu Gharab, Fakka is part of the Maysan Fields, with an estimated 2.463 billion barrels of reserves.
According Iraq's Oil Ministry, oil output in Fakka began in the 1970s but was suspended during the Iran-Iraq war.
The Maysan engineer said output was now around 10,000 barrels per day and capacity was 20,000 barrels per day.
Iraq offered the Maysan oilfield complex to global energy firms in its first postwar development contract auction in June.
But a Chinese consortium, the sole group to bid on the fields, declined the Oil Ministry's proposal for fees.