(Adds Baghdad car bomb, Bush call with Iraqi leaders) By Alister Bull and Dean Yates BAGHDAD, July 3 (Reuters) - 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. In fresh violence, a car bomb killed 21 people and wounded 36 near an outdoor market in Baghdad's Shi'ite neighbourhood of Shaab, police said. They said a parked car exploded just before nightfall, when residents were shopping. 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 news conference, calling it the "most important" law in Iraq. OIL RESERVES 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 of 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. Bush spoke separately by telephone to Iraq's top leaders on Tuesday including Maliki, the country's president and the two vice presidents, the White House said. Spokesman Tony Snow said Bush encouraged all of them to move "not only aggressively forward" on political reforms but to "work well with one another". The main Sunni bloc is boycotting both cabinet and parliament meetings in protest at what it says is unfair treatment against its members, although the move also reflects the deep divisions between Iraq's politicians. (Additional reporting by Mariam Karouny, Ahmed Rasheed, Mussab Al-Khairalla and Waleed Ibrahim)
