Iraq pledged on Tuesday to rein in Kurdish rebels who are launching attacks on Turkey from mountain hideouts near the border after Ankara threatened to send forces into Iraqi territory to confront the guerrillas.
Turkish Foreign Minister Ali Babacan flew to Baghdad for crisis talks with Iraq's leaders, and said he had received assurances Iraq would support Turkey in fighting "terrorism".
Turkish Prime Minister Tayyip Erdogan said Ankara was giving diplomacy a chance, but reminded Iraq that Turkey's parliament had given the go-ahead for a military incursion at any time.
PKK separatists, operating from northern Iraq, killed at least a dozen Turkish soldiers in weekend fighting.
"Right now we are in a waiting stance but Iraq should know we can use the mandate for a cross-border operation at any time," Erdogan told a joint news conference in London after talks with British Prime Minister Gordon Brown.
He later ratcheted up pressure by telling an investors' conference in London that Turkey may impose trade sanctions.
"We may impose some sanctions with respect to some goods we export to Iraq," Erdogan said. Bilateral trade between the two countries is worth around $5 billion a year.
Iraqi Foreign Minister Hoshiyar Zebari told Babacan that Iraq would restrict the movement of PKK rebels and target their funding. But it was not clear whether this would be enough to placate Turkey, which wants an end to cross-border attacks.
"I assured the minister that the Iraqi government will actively help Turkey to overcome this menace," Zebari, himself a Kurd, told a news conference. "We will not allow any party, including the PKK, to poison our bilateral relations."
Iraqi President Jalal Talabani, also a Kurd, said PKK attacks on Turkey would not be tolerated.
"We have given the PKK the option to leave or disarm. We care for every drop of Turkish blood like we care for every drop of Iraqi blood," he said after talks with Babacan.
But there were few concrete details on how PKK rebels could be reined in. Iraq has said that its forces are too busy fighting elsewhere in the country. Any military offensive would need to involve U.S. troops.
Washington has so far been reluctant to attack PKK rebels, fearing this could damage ties with Iraqi Kurds and destabilize the Kurdish region, the only area of Iraq to see relative stability and prosperity since Saddam Hussein was toppled.
Turkey estimates 3,000 PKK rebels are based in Iraq. Ankara believes U.S. forces in Iraq have the capability of capturing PKK leaders hiding in the Qandil mountains, shutting down their camps and cutting off supply routes and logistical support.
CHANCE FOR DIPLOMACY
Turkey's government says it will use all diplomacy options before launching any strike into northern Iraq against the PKK. The easing in rhetoric helped bring global oil prices down from record highs.
But Babacan said the Turkish people were losing patience.
Turkey has deployed as many as 100,000 troops, backed by tanks, F-16 fighter jets and helicopter gunships along its border in preparation for a possible attack on rebel bases.
"If expected developments do not take place in the next few days, we will have to take care of our own situation," Erdogan said in Oxford, England, on Monday.
Washington and Baghdad have been calling on NATO member Turkey to refrain from a military push into Iraq.
Secretary of State Condoleezza Rice and Britain's visiting foreign secretary, David Miliband, said they had proposed a meeting in Istanbul next month of officials from the United States, Turkey and Iraq to discuss how to stop the attacks.
Iraq's Talabani said on Monday the PKK would announce a ceasefire. Later the guerrilla group said in a statement it was ready for peace if Ankara stopped its military offensive against Kurdish fighters. It made no mention of a ceasefire.
Babacan said any ceasefire offer would be meaningless as the PKK was a terrorist organization, not a sovereign army.
Turkey's government is under public and military pressure to strike in Iraq against the group which has killed some 40 Turkish soldiers in the past month.
The Turkish military said 12 soldiers died in Sunday's fighting and 34 rebels had been killed in an army offensive backed up by helicopters and artillery over the past two days.
The pro-PKK Firat news agency said eight soldiers had been captured in the fighting. Turkey has denied any of its troops were captured, but confirmed eight soldiers were missing.
(Additional reporting by Evren Mesci and Gareth Jones in Ankara and Adrian Croft in London)