(Adds U.S. comment, paragraphs 12-13) By Ahmed Rasheed BAGHDAD, Feb 25 (Reuters) - An oil law crucial to resolving political divisions in Iraq edged closer to approval after Kurds said some key issues were resolved, officials said on Sunday. Passing an oil law to help settle potentially explosive disputes among Iraq's ethnic and sectarian communities over the division of oil reserves has been a key demand of the United States in providing further military support to the government. Officials are in last ditch talks to finalise a draft law that sets rules for sharing the wealth from the world's third largest oil reserves. Agreement was nearly reached last month but leaders in the largely autonomous Kurdish region in northern Iraq demurred, saying they still had concerns about relations between regions and Baghdad. A top aide to Kurdish regional president Masoud Barzani said on Sunday letters had been exchanged between the two sides in recent weeks and solutions found to some problems. "Some of the issues in debate between the Kurdish regional government and the federal government in Baghdad were solved recently," Fauad Hussain, head of the presidency board in Kurdistan, told Reuters on Sunday. "The Kurdish regional government approved the submission of the oil draft law to parliament..." Hussain said. But he added: "The whole issue is still under discussions and it's only a draft law." STILL UNDER DISCUSSION "The Kurds agreed on the key points which clarify the annexes of the oil law and the issue of the way that regions can manage oil resources all over the country, including the Kurdish region," he said. Barzani met Iraqi President Jalal Talabani, who is also a Kurd, and U.S. Ambassador Zalmay Khalilzad on Saturday. "We agreed on the draft of the law but still there are some articles under debate with the central government," Barzani said at a joint news conference with Talabani. Talabani said the key issue discussed at their meeting was the oil law and they had come "close to final approval". U.S. embassy spokesman John Roberts welcomed the comments by the two Kurdish leaders as indicating "good progress". "This is an encouraging development," he said. "It represents a move forward in terms of the negotiation process and we welcome any movement towards agreement." A government source with close knowledge of the oil law debate, who spoke on condition of anonymity because he was not authorised to speak to the media, said no final agreement was reached on the draft when the cabinet last met on Feb. 22. "Discussions in the cabinet on the oil draft haven't reached a compromise and the key conflicting issue of the regions having authority to approve deals with foreign companies is still in debate," the source said. The source said the cabinet would meet on Wednesday for further discussions on the law. Once it is approved by the cabinet, the law will go to parliament. The Iraqi oil ministry had no comment on whether the Kurds had approved the draft oil law. The Kurdish government has had reservations on the wording regarding the powers of a federal council, to be established under the law, which will set the oil policy and lay down ground rules for contracts signed with foreign firms. Officials from Kurdistan, where relative security has encouraged more development than elsewhere in Iraq, have said they want assurances the federal council will not invalidate their existing contracts, including with Norway's DNO. (Additional reporting by Shamal Aqrawi and Sherko Raouf)
