* Iraq's Kurdistan oil feud delays 2013 budget
* Baghdad resists paying Peshmerga salaries
* Kurdistan wants Baghdad to pay oil companies
By Suadad al-Salhy
BAGHDAD, Feb 15 (Reuters) - A dispute between Iraq's government and the autonomous region of Kurdistan over oil rights is delaying this year's national budget, jeopardising much-needed investment, as the country's finances have become a new front in the long-running feud.
Iraq's cabinet approved the $118.6 billion budget in October, but infighting among Shi'ite, Sunni and Kurdish factions this week scuttled attempts by lawmakers to pass the draft legislation in parliament.
A year after the last U.S. troops left, Iraq's economy is improving and should grow 9 percent this year, the central bank projects, as oil production expands.
However, it still needs investment in everything from infrastructure to transport to rebuild the economy, and key oil and investment laws languish in parliament because of political turmoil.
Lawmakers will try again next week to reach agreement on the 2013 national budget. Further delays would postpone major infrastructure projects and payments to regional authorities in the OPEC producer whose state coffers are financed almost entirely by crude exports.
The budget, which foresees a deficit of $15.5 billion, includes $45.5 billion for investment projects and has allocated $644 million for companies working in Kurdistan.
Iraq has the world's fourth-largest oil reserves and oil resources are at the heart of the broad dispute over territory, oilfields and political autonomy between Baghdad's Arab-led government and Kurdistan, where ethnic Kurds run their own regional administration.
While Kurdistan has a regional government and armed forces, it contributes its oil to national exports and relies on Baghdad for 17 percent of the federal budget, which is financed almost completely by the sale of crude.
Prime Minister Nuri al-Maliki's State of Law coalition, Sunni-backed Iraqiya Bloc and some other political blocs this week called for Kurds to get no more than 12 percent of the budget based on their minority population, increasing tensions with the northern Kurdish enclave.
The political blocs in Baghdad say Kurdistan's portion should also be cut to make up for the deficit after the autonomous region stopped oil shipments in protest over Baghdad's failure to compensate companies working there.
Kurds say U.S. authorities assigned them 17 percent based on their estimates after the 2003 invasion.
Lawmakers said the political blocs also disagree on the amount owed to those oil companies and over the payment of Kurdistan's Peshmerga armed forces.
"Maliki is trying to use the budget to twist our arm," said Kurdish MP Rawaz Khoshnaw. "It's just a political tool that they are using against the Kurdistan regional government."
The ongoing turf war over oil and land rights escalated late last year to the point that both the central government and the autonomous region deployed troops to reinforce positions along their disputed internal border.
Maliki's supporters say the budget dispute has also revived a disagreement between the central government, Shi'ite and Sunni blocs over the Peshmerga's role in Iraqi security.
"Peshmerga pointed their guns to the chests of the Iraqi military personnel, and now they want us to equip them and pay their salaries," said Mohammed al-Sayhood, a lawmaker in Maliki's coalition.
Payments to oil companies operating in Kurdistan is still the biggest disagreement in the budget. Kurds says they are owed more than 4 trillion Iraqi dinars, or $3.5 billion, by Baghdad to cover the costs accumulated by oil companies over the past three years.
But the Iraqi government allocated just 750 billion Iraqi dinars ($644.33 million), accusing the Kurdish of illegally shipping some of its oil out of the country instead of contributing to the national budget.
The central government in Baghdad says it alone has the authority to exploit and export the country's crude, but the Kurds say their right to sign deals is enshrined in Iraq's federal constitution and have granted contracts to companies such as Exxon Mobil, Chevron and Total .
Kurdistan has enticed oil companies by providing lucrative production-sharing contracts and better operating conditions than in the south of the country.
"It is a very big sum of money," said Jaber al-Jabri, a lawmaker from the Sunni-backed Iraqiya Bloc who is also a member of the Finance Committee, referring to the more than 4 trillion dinars demanded by the Kurds in back payments.
"Most blocs have not agreed to include it in the budget." (Additional reporting by Isabel Colse in Arbil, Iraq; Editing by Patrick Markey and Susan Fenton)