In addition to the intermittent ethnic violence in the city, Kirkuk is at the centre of a national parliamentary gridlock. In July, Iraqi Kurdish parties and their ally in the ruling coalition, the Islamic Supreme Council of Iraq, blocked a provincial election law - legislation seen by the United States and key regional actors as critical to recalibrating Iraq's shaken political system. The parliament approved a revised law in September on the basis of a compromise proposed and encouraged by the United Nations, whereby a separate parliamentary committee will address disputes on Kirkuk outside the framework of provincial elections, allowing voting to proceed in the rest of the country. So the fundamental disputes over the city remain, and the feasibility of future legislative efforts and the country's future depend on addressing the “Kirkuk veto.”

Paradoxically, this dispute also holds the potential for political compromise on the future shape of the Iraqi state. If the country's leaders can get Kirkuk right, there is real hope Iraq can stabilize into something more closely resembling a governable state.

Beyond the basic territorial issue, Kirkuk's future status touches on fundamental issues that divide Iraqis, including the nature of federalism, prospects for provincial elections and the management of oil wealth. The scope of these concerns and the difficulty of reaching piecemeal agreements complicate legislative progress, as do shifting parliamentary alliances and the Kurdish parties' ability to hold federal legislation hostage to their aspirations in Kirkuk.

The interlocking nature of the issues involved suggests that a comprehensive deal - a grand bargain - makes political sense. And it seems quite possible given the precedent set by a package deal earlier this year, when national legislators agreed on a national budget, an amnesty and provincial powers all at once.

The key aspects of a grand bargain are widely understood. All sides would agree that the process will fulfill the requirements of the Iraqi constitution and reflect the will of those affected by any agreement on disputed territories. The broad outlines of the deal would include: passage of a provincial election law for Kirkuk and agreement on the city's special status as a standalone federal region for an interim period with provisions for power sharing; adjustment of provincial boundaries; agreement on oil and gas management and revenue distribution; and constitutional revision to reflect the terms of a negotiated solution. In keeping with constitutional requirements, the terms of any such negotiated solution would be submitted to a popular referendum.

The snag may well be that, aside from their historical claims, Kurds have understood incorporation of Kirkuk and its oil wealth as a first step toward viable independence. Toward this end and through their alliance with the U.S. military, they have established their political and military supremacy in the city. For Kurdish leaders who have staked much of their legitimacy on their push for control of Kirkuk, such a compromise would be difficult to sell to their own people, who have not forgotten the “Arabization” and forced expulsion campaigns under Saddam Hussein.

However, the undeniable blow felt by Kurds would be softened by the legal right to develop their own oil and gas wealth, legal assurances on the equitable distribution of all Iraqi hydrocarbon wealth, and secure and recognized boundaries for the Kurdistan region. Moreover, by soothing the sensibilities of neighbours hostile to their aspirations, such as Turkey and Iran, the Kurds would limit opportunities for outside interference. Finally, in light of increasing tensions and splits within the ruling coalition over Kirkuk, compromise would guarantee the Kurds a continuing and vital role in affecting policy decisions in Baghdad.

As for the Kurds' opponents - a motley alliance of Turkomen, Sunni Arabs and the majority of Shiites, who have been hostile to Kurdish territorial claims and manoeuvring on hydrocarbon legislation - an agreement on special status for Kirkuk might bring them around on other legislation as well. In turn, agreement on an oil and gas law would help cement cohesion of the Iraqi state and help guarantee equitable distribution of oil wealth, particularly to areas bereft of natural resources. U.S. leaders should encourage current UN-led efforts to establish a clear process for resolving the status of Kirkuk and power relations within it, as well as in other mixed-population areas claimed by the Kurds.

The struggle over disputed territories has also stoked tensions in other areas of the country. In the eastern city of Khanaqin, Kurdish troops who control security in the city recently engaged in a standoff with Iraqi security forces that raised the prospect of Arab-Kurdish violence and threatened to undermine the governing coalition.

Although rising tensions highlight the fragility of the current situation, the Kirkuk conflict also offers a unique opportunity to seek a broad-based compromise. The prospects for advancing a “grand bargain“ are far from assured. However, recent progress on security will prove ephemeral if the major political disputes roiling Iraq are not dealt with expeditiously.

Michael Wahid Hanna is a program officer at The Century Foundation in New York. Joost Hiltermann is deputy program director for the Middle East at the International Crisis Group in Istanbul. This was originally published in The Globe and Mail.