By Suadad al-Salhy and Sylvia Westall
BAGHDAD, Sept 19 (Reuters) - In Sadr City, an impoverished district of northeastern Baghdad, local people say the anger of Shi'ite Muslims against Sunni militants is ready to erupt into violence.
"Iraq today is boiling like a volcano and it could blow at any minute," said Ali al-Husseini, a 27-year-old cleric.
So far, Iraq's Shi'ite majority has stayed largely quiescent, despite the highest violence for five years, with car bombs and other attacks killing hundreds of people every month.
But officials have told Reuters the government is looking at plans to create a government-backed Shi'ite militia to counter al Qaeda, which is undergoing a resurgence in the country. The government hopes a unified force will help protect the population and prevent local Shi'ite militias taking matters into their own hands. Sunnis are not so sure.
Such a project could be helpful if prominent locals, such as tribal chiefs, are involved, said Qais al-Shathir, a senior Sunni lawmaker. "But if this project is adopted by political sides ... then this will certainly give official cover for the militias and this will negatively impact the security situation."
Three senior officials in the Shi'ite-dominated administration of Prime Minister Nuri al-Maliki said the government plans to combine at least three Shi'ite militias into a single force. "All Shi'ite factions have agreed with this plan," a senior official in Maliki's office said.
The idea is to combine elements from the Asaib al-Haq and Kata'ib Hezbollah militias, which ceased fighting in Iraq after 2011, as well as the Mehdi army, which is loyal to anti-U.S. preacher Moqtada al-Sadr and which stepped aside from the fighting in 2008.
The plan, said the official, is partly designed to boost Maliki's credentials ahead of elections in 2014. "Maliki will present himself as the Shi'ite defender," the official said.
It comes as the increase in violence, fed in part by the conflict in neighbouring Syria where Islam's two main strands are also at odds, is raising fears that Iraq could return to the bloody days of 2006-2007 when tens of thousands of people died.
"The aim of al Qaeda is clearly to provoke a civil war," a Western diplomat in Baghdad said. It was remarkable, the diplomat added, that a Shi'ite backlash had not yet occurred.
Maliki's delicate cross-sectarian political alliance was supposed to share power between Shi'ites, who make up just over 60 percent of Iraq's 32 million people, and Sunnis and Kurds, who make up roughly 20 percent each. But it has been paralysed since U.S. troops withdrew in 2011, stalling legislation and policymaking in a country that still needs to rebuild its infrastructure after years of war and sanctions.
Tensions spilled onto the streets in December when thousands of Sunnis in the western provinces of Anbar, Nineveh and Salahuddin, in central Iraq, protested against Maliki, demanding he step down over what they saw as the marginalisation of their sect.
Protesters were furious after state officials arrested the bodyguards of the Sunni Finance Minister, Rafie al-Esawi, on terrorism charges. Authorities denied the arrests were political, but Sunni leaders saw them as a crackdown. Esawi later resigned at an anti-Maliki rally.
Tareq al-Hashemi, Iraq's vice-president and one of the most senior Sunni politicians, has fled the country and been sentenced to death in absentia for running death squads, which he denies. Many Iraqi Sunnis say they see a sectarian hand behind Hashemi's case.
These steps have undermined the power-sharing pact, forged after elections in 2010, between Iraq's different sectarian and ethnic groups.
After the protests the government made some concessions, such as releasing hundreds of detainees and granting pensions to former army officers and members of the Baath Party that dominated Iraq under Saddam Hussein. But seven months on from the unrest, day-labourer Mohammed Abdullah said Sunni demands had still not been met. "The government does not recognise us, we do not recognise it and we will work to topple it because we are facing a crucial battle to prove the Iraqi identity," the 54-year-old said in the city of Fallujah, 70 km (43 miles) west of Baghdad. "As a last option, maybe we will carry arms against the government."
Ramzy Mardini, an analyst at the Iraq Institute for Strategic Studies in Beirut, believes Maliki's response in the run-up to next year's elections will be crucial. "A heavy-handed Baghdad response toward the Sunni population will inflame sectarian tensions even further and play into al Qaeda's hands."
Tensions are already inflamed by the fighting in Syria, which is spilling over its border with western Iraq.
A 15-minute video posted on jihadi forums in August showed an al Qaeda fighter backed up by dozens of militants in pickup trucks blocking a desert highway in western Iraq. The attackers interrogate three Syrian drivers about their religion, then gun them down outside the town of Rutba, 360 km west of Baghdad.
On the video, the assassins identify the dead drivers as Alawites - members of the offshoot of Shi'ite Islam that rules Syria under President Bashar al-Assad. The militants accuse the drivers of transporting supplies from Iraq to Assad's forces, who are fighting al Qaeda-linked rebels in Syria.
Fighters and supplies are passing back and forth through Iraq's porous 680-km border with Syria - which locals now call "Death Valley" - especially in the western Anbar province.
The al Qaeda cell which claimed the highway attack, the Islamic State of Iraq and the Levant, has said it is behind this year's wave of bombings, as well as a mass jail break in July. The Iraqi-based operation has expanded into Syria.
It's a combustible mix. Maliki, whose government is close to Shi'ite-ruled Iran, Assad's staunchest ally, sees rebel forces in Syria as a far greater problem than Assad. The jihadists say they want to carve out an Islamist "emirate" from eastern Syria and western Iraq.
In Iraq, al Qaeda has strengthened its presence around Baghdad and in some northern regions. Fighters now control most of the villages and towns in an area known as the Hamrin Mountains basin, which links the northern provinces of Diyala, Salahuddin, Kirkuk and Mosul, say security officials, residents and local lawmakers.
Many al Qaeda members are former officers of Saddam Hussein's intelligence services or army. Baathists may offer support to al Qaeda even if they have not joined it, said Amer al-Khuzaei, an adviser to Maliki.
"They do not wear an explosive belt or blow themselves up, but they are planning, providing intelligence, nominating the targets and providing all kinds of logistical support," he said.
Members of Sunni militia groups are buying farms and houses to hide militants, and prepare suicide bombers and explosives, a senior security official in Baghdad said, citing reports from police and military officers working on the ground.
"The same coalition of jihadi interests in Iraq seems to have been recreated as existed in 2006 and 2007," said Crispin Hawes, director of Middle East and North Africa analysis at risk consultancy Eurasia Group.
MONEY AND MISTAKES
As well as blaming Iraq's increased violence on the Syrian conflict, the Maliki government also says al Qaeda in Iraq is receiving more funds from Arab countries in the Gulf.
"Withdraw your hands with their black fingers and leave us as Iraqis to live in peace and love," Maliki said in a televised speech on August 14 in which he called on Arab countries to "stop earning the enmity" of Iraq by funding insurgents.
Saudi Arabia has not commented publicly on accusations about such funding and did not respond to request for comment for this report. Diplomats in the Gulf say that Saudi Arabia works hard to prevent private funds going to militant groups, but that money still gets through.
Western diplomats and some junior Iraqi intelligence officials believe al Qaeda has also thrived in part because of mistakes by Maliki's government.
Since militants staged the daring jail break in July - in which more than 500 al Qaeda fighters are believed to have escaped - the government has arrested hundreds of Sunnis in a campaign called "Avenge the Martyrs." To the north west of Baghdad, residents in Tarmiya town said special forces had angered Sunnis when searching the area as part of the campaign.
"They provoked people by burning down one of the (palm) groves for no reason," said a man who gave his name as Abu Mustafa. "They destroyed the furniture of some of the houses they raided," he added. He said police had stolen items from homes.
Other critics accuse the government of incompetence. One senior Shi'ite politician who lives in Diyala province, to the east of Baghdad, said: "The real problem, entirely, is the mismanagement of the security file (operation)."
Raids in Diyala were publicised in the media ahead of time, allowing militants to escape, he said, voicing frustration with the security forces for not targeting the right areas because of lack of local knowledge.
Families of Sunnis who were arrested or killed in previous raids have been abandoned, stoking resentment, he said. "They are all in dire need of financial support and the government ... is not trying to take care of them. So they become hotbeds for terrorism."
Iraq is not at the level of a civil war yet, according to Fuad Hussein, chief of staff to Massoud Barzani, leader of Iraq's autonomous northern Kurdish region, which tries to stay out of the Sunni-Shi'ite battles. "But those fighting each other express themselves (as) belonging to these ideologies and this is very dangerous."
Shi'ite cleric Moqtada al-Sadr, who is based in both the Iraqi holy city of Najaf and the Lebanese capital Beirut, has repeatedly declined to comment on any of his followers' recent activities. But a visit to Sadr City in northeastern Baghdad goes some way to explaining why a backlash has not yet emerged - and why it still could.
The district is named after Sadr's late father, who was also a cleric. Portraits of both men dominate squares and street corners. Residents of the neighbourhood are outraged by the number of bomb attacks by the Iraqi arm of al Qaeda. But so far, they say, they have not fought back because this would set off a new cycle of retributive killings that most want to avoid.
Husseini, the 27-year-old follower of Sadr, said he had decided against taking up arms, at least for now, because insurgents were spread among the wider community.
"The enemy here is hidden, I cannot target everyone in order to reach the enemy," Husseini said.
Ali, a 32-year-old former member of Sadr's Mehdi army, said the violence in 2006-2007 was driven by Shi'ite reprisals against the Sunni community and such a situation was unlikely to happen again. But he added that if Sadr called his followers to arms, the fighters were ready.
"We still have our weapons and are ready to respond in any minute," he said. (Additional reporting by Kareem Raheem in Baghdad, Kamal Na'ama in Ramadi and Angus McDowall in Riyadh; Editing by Simon Robinson and Richard Woods)