* Arbil oasis of calm through decade of conflict
* Now Islamist militants are just 30 minutes drive away
* Kurds rush to arms market, fear infiltration
* Foreign oil workers flee
By Isabel Coles
ARBIL, Iraq, Aug 9 (Reuters) - With Islamist militants just 30 minutes drive away, foreign oil workers were flying out of Iraq's Kurdish capital by the hundreds and business was booming in the city's arms market.
Spared a decade of sectarian conflict in the rest of Iraq, Kurds in Arbil were stocking up on weapons on Friday and keeping a wary eye on their Arab neighbours as they faced what a senior official called "an existential threat" from the Islamic State.
"People in Arbil are quitting their jobs and coming to buy weapons so they can go to fight," said Alan, a 35-year-old gun merchant, who worked in a pizza shop during 12 years in the United Kingdom.
He sold 45 guns on Thursday alone, fetching $1,300 for an assault rifle that used to cost $700.
"Of course people are scared. Is Arbil threatened? Yes, it is in danger."
The Sunni militants - rejected by al Qaeda as too extreme - have seized tanks, machinegunes and other heavy weapons from Iraqi soldiers who fled their advance through the north by the thousands in June, giving them unprecendented momentum.
The march on Arbil they began on Thursday is the biggest security threat to the city since former Iraqi dictator Saddam Hussein's troops menaced the region. The group is notorious for beheading or shooting anyone who defies them.
"It's not usually like this. People are buying to defend their land and their honour," said 40-year-old arms merchant Sherwan Mohammed Darbandi. "We won't let them come here. They don't have the ability to reach Arbil."
On Thursday, the Sunni militants put their black flag over a checkpoint in the border area near with the semi-autonomous Kurdish region, marking a dramatic push that gave them a fifth oilfield, more towns and control over Iraq's biggest dam.
The start of U.S. airstrikes on Islamic State positions on Friday eased nerves but demand for weapons is climbing nonetheless, driving up prices of AK-47 assault rifles even though they cannot do much against the Islamic State's arsenal.
FOREIGN OIL COMPANIES
It was not meant to be this way in Kurdistan, which attracted foreign oil companies who felt safe working here. Hundreds of their employees departed from Arbil's airport on Friday, taking no chances.
"The company told us to leave because it's not safe for us anymore," said a worker at an oil services company who asked to remain unnamed and was evacuated from a rig site on Thursday. He did not expect to return to work again soon: "We're on standby until further notice".
The Kurdish peshmerga, which translates as "those who confront death", have always been regarded as brave men, who battled with Saddam Hussein's troops.
Islamic State fighters routed them, and forced tens of thousands of members of the Yazidi ethnic minority and Christians to flee for their lives.
A senior Kurdish official said US airstrikes on Friday had destroyed a convoy of 10 Islamic State armoured vehicles that were on their way to Arbil, but said the city was safe for now.
"The Islamic State is mobilising all its forces in Iraq and Syria to come and fight the peshmerga. The fight is very serious. It is existential," Hoshiyar Zebari told a news conference.
Some families in Arbil fled the city for safety, and those who stayed bought extra supplies of fuel and food. On Thursday night, young men danced on a busy commercial street to show support for the security forces and that they were not afraid.
Kurds like 22-year-old student Kawan Mahmoud are taking matters into their own hands. He was one of the shoppers at the arms bazaar.
"I came to buy weapons so I can go to war," said Mahmoud. "I am not a peshmerga but I am going to volunteer myself."
Some Kurds have become deeply suspicious of their Arab neighbours overnight. The region has given refuge to tens of thousands of Arabs displaced by violence in the rest of the country since the start of the year.
"We opened the doors to the Arabs but yesterday we discovered that in some houses they have weapons," said Ziad Taha Aziz, 44, who sells shoe polish and brushes at a stall in the market.
"Some of them are good, and some of them are bad. We need to arrest them all and see whether there are traitors among them. We think there are sleeper cells." (Writing by Michael Georgy; editing by Philippa Fletcher)