* Tens of thousands flee advance of Islamic State
* Islamic State engineers repairing newly captured dam
* Islamist insurgents have drawn U.S. air strikes
* Kurdistan gets extra heavy weaponry from Baghdad
(Adds Islamic State delivering bodies of fighters to morgue)
By Michael Georgy
BAGHDAD, Aug 9 (Reuters) - Islamic State insurgents who seized Iraq's biggest dam in an offensive that has caused international consternation have brought in engineers for repairs, witnesses said on Saturday, as nervous Kurds stocked up on arms to defend their enclave nearby.
The jihadi Islamists have captured wide swathes of northern Iraq since June, executing non-Sunni Muslim captives, displacing tens of thousands of people and drawing the first U.S. air strikes in the region since Washington withdrew troops in 2011.
After routing Kurdish forces this week, Islamic State militants are just 30 minutes' drive from Arbil, the Kurdish regional capital which up to now has been spared the sectarian bloodshed that has scarred other parts of Iraq for a decade.
Employees of foreign oil firms in Arbil were flying out. Kurds were snapping up AK-47 assault rifles in arms markets for fear of imminent attack, although these had been ineffective against the superior firepower of the Islamic State fighters.
Given the Islamic State threat, a source in the Kurdistan Regional Government said it had received extra supplies of heavy weaponry from the Baghdad federal government "and other governments" in the past few days, but declined to elaborate.
An engineer at Mosul dam told Reuters that Islamic State fighters had brought in engineers to repair an emergency power line to the city, Iraq's biggest in the north, that had been cut off four days ago, causing power outages and water shortages.
"They are gathering people to work at the dam," he said.
A dam administrator said that militants were putting up the trademark Islamic State black flags and patrolling with flatbed trucks mounted with machineguns to protect the facility they seized from Kurdish forces earlier this week.
The Islamic State, comprised mainly of Arabs and foreign fighters who want to reshape the map of the Middle East, pose the biggest threat to Iraq, a major oil exporter, since Saddam Hussein was toppled by a U.S.-led invasion in 2003.
The Sunni militants, who have beheaded and crucified captives in their drive to eradicate unbelievers, first arrived in northern Iraq in June from Syria where they have captured wide tracts of territory in that country's civil war.
Almost unopposed by U.S.-trained Iraqi government forces who fled by the thousands, the insurgents swept through the region and have threatened to march on Baghdad with Iraqi military tanks, armoured personnel carriers and machineguns they seized.
In their latest offensive, they also grabbed a fifth oilfield that will help them fund operations, in addition to several towns and the dam, which could allow them to flood cities and cut off vital water and electricity supplies.
BOMBS AND SUPPLIES
The U.S. Defense Department said two F/A-18 warplanes from an aircraft carrier in the Gulf had dropped laser-guided 500-pound bombs on Islamic State artillery batteries. Other air strikes targeted mortar positions and an Islamic State convoy.
U.S. President Barack Obama said the action was needed to halt the Islamist advance, protect Americans in the region as well as hundreds of thousands of Christians and members of other religious minorities who have fled for their lives.
U.S. military aircraft dropped relief supplies to members of the ancient Yazidi sect, tens of thousands of whom have collected on a desert mountaintop seeking shelter from insurgents who had ordered them to convert or die.
An official at Mosul's morgue told Reuters that Islamic State fighters brought the corpses of ten comrades who were killed by a U.S. airstrike at the Kurdish border.
The Islamic State's campaign has returned Iraq to levels of violence not seen since a civil war peaked in 2006-2007 during the U.S. occupation.
Just south of Baghdad in the town of Madaen, gunmen killed a government-backed Sunni militiaman opposed to the Islamic State. His family was also killed, police and medical sources said.
On the southern outskirts of the capital in the town of Uwerij, authorities found the bodies of four men who had been blindfolded and shot in the head execution-style, police said.
The territorial gains of Islamic State, who also control a third of Syria and have fought this past week inside Lebanon, has unnerved the Middle East and threatens to tear apart Iraq, a country split between mostly Shi'ites, Sunnis and Kurds.
Attention has focused on the plight of Yazidis, Christians and other minority groups in northern Iraq, one of the most demographically diverse parts of the Middle East for centuries.
In Washington, the Pentagon said planes dropped additional supplies, bringing the total to 36,224 ready-to-eat meals and 6,822 gallons of drinking water, for threatened civilians near Sinjar, home of the Yazidis. They are ethnic Kurds who practice an ancient faith related to Zoroastrianism.
The Islamic State considers them to be "devil worshippers".
WEAPONS AND CASH
The semi-autonomous Kurdish region has until now been the only part of Iraq to survive the past decade of civil war without a serious security threat.
Its vaunted "peshmerga" fighters - those who "confront death" - also controlled wide stretches of territory outside the autonomous zone, which served as sanctuary for fleeing Christians and other minorities when Islamic State fighters stormed into the region last month.
But the past week saw the peshmerga crumble in the face of Islamic State fighters, who have heavy weapons seized from fleeing Iraqi troops and are flush with cash looted from banks.
However, oil production from Iraqi Kurdistan -- estimated at some 360,000 barrels per day in June -- remained unaffected by the Islamic State incursions, its Ministry of Natural Resources said on Saturday.
A U.N. relief spokesman said some 200,000 people fleeing the Islamists' advance had reached the town of Dohuk on the Tigris River in Iraqi Kurdistan. Tens of thousands had fled further north to the Turkish border, Turkish officials said.
Iraqi Prime Minister Nour al-Maliki is a Shi'ite Islamist accused by opponents of fuelling the Sunni insurgency by running an authoritarian sectarian state.
He has refused to step aside to break a stalemate since elections in April, defying pressure from Washington and Tehran.
Obama, who brought U.S. troops home from Iraq in 2011 to fulfil a campaign pledge, insisted he would not commit ground forces against Islamic State and had no intention of letting the United States "get dragged into fighting another war in Iraq".
But questions swirled in Washington about whether selective air strikes on the positions of highly mobile, guerrilla-like militants and humanitarian air drops would be enough to shift the balance on the battlefield.
(Editing by Mark Heinrich and Crispian Balmer)