Iraq's cabinet approved changes to a draft hydrocarbon law on Tuesday and sent it to parliament for immediate debate, taking a big step towards meeting a key political target set by the United States.
Washington has pushed Iraq for months to speed up passage of the law and other pieces of legislation, which are seen as vital to curbing sectarian violence and healing deep divisions between majority Shi'ites and minority Sunni Arabs.
The law is intended to ensure a fair distribution of the world's third largest oil reserves, which are located mainly in the Shi'ite south and the Kurdish north of the country.
Sunni Arabs, the backbone of the insurgency, live mainly in central provinces that have little proven oil wealth and have long feared they would miss out on any windfall should violence ease enough to revive the struggling industry.
The law was approved unanimously (by the cabinet) ... it was referred to the parliament which will discuss it tomorrow, Shi'ite Prime Minister Nuri al-Maliki told a press conference, calling it the most important law in Iraq.
I call on all our partners in the political process and in this national unity government to respect this deal.
In the latest violence, U.S. forces killed 23 militants suspected of links with al Qaeda during a fierce battle in the western Anbar province over the weekend, the military said.
The U.S. military also said was reviewing an F-16 air strike on insurgent targets in the southern city of Diwaniya after local officials said 10 civilians were killed in the attack. A hospital source said six children were among the dead.
The draft oil law was originally approved by the cabinet in February but faced opposition from the government in autonomous Kurdistan, which felt it was getting a raw deal.
Besides deciding who controls the country's oil reserves and setting up a new oil firm to oversee the industry, the law aims to provide a legal framework for attracting foreign investment.
Other major laws also need to be passed that set provincial elections by the end of the year and that allow some members of Saddam Hussein's Baath party to return to government and the military. Maliki said these would be discussed next week.
But parliament is running out time to debate and approve the series of laws. It has already extended its current session to the end of July, before legislators take a month off.
That leaves little time before the U.S. military commander in Iraq, General David Petraeus, and Ambassador Ryan Crocker have to present a report to Washington in the middle of September on Iraq's security and political progress.
The report is being viewed as a political watershed, with U.S. President George W. Bush under mounting pressure to show his Iraq strategy is working and with campaigning in the 2008 U.S. presidential race already well under way.
In Anbar province, U.S. and Iraqi forces backed by war planes and helicopters confronted a large group of militants as they were preparing to launch a series of suicide bomb attacks in the Anbar capital Ramadi, 110 km (70 miles) west of Baghdad.
The group, affiliated with al Qaeda in Iraq, intended to regain a base of operations in Al Anbar with suicide car and vest bomb attacks, the U.S. military said in a statement.
Anbar was once the heart of the Sunni Arab insurgency and the most dangerous region for American soldiers in Iraq.
But Sunni Arab tribes began to turn against Sunni Islamist al Qaeda last year, angered by the group's indiscriminate killing of civilians and harsh interpretation of Islam.
The air strikes in Diwaniya were ordered after insurgents fired some 75 mortar bombs and rockets at a coalition military base in the city before dawn on Monday, the U.S. military said in a statement. Three soldiers were wounded.
It said the engagement was being reviewed to determine whether appropriate and proportionate force was used.
(Additional reporting by Mariam Karouny, Ahmed Rasheed, Mussab Al-Khairalla and Waleed Ibrahim)