Sunni insurgents seized a mainly ethnic Turkmen city in northwestern Iraq on Sunday after heavy fighting, solidifying their grip on the north after a lightning offensive that threatens to dismember Iraq.

Residents reached by telephone in the city of Tal Afar said it had fallen to the rebels from the Islamic State of Iraq and the Levant after a battle that saw heavy casualties on both sides.

"The city was overrun by militants. Severe fighting took place, and many people were killed. Shi'ite families have fled to the west and Sunni families have fled to the east," said a city official who asked not to be identified.

Tal Afar is a short drive west from Mosul, the north's main city, which the ISIL fighters seized last week at the start of a drive that has plunged the country into the worst crisis since US troops withdrew.

The advance has alarmed Prime Minister Nuri al-Maliki's Shi'ite supporters in Iran as well as the United States, which helped bring Maliki to power after its 2003 invasion that toppled Sunni dictator Saddam Hussein.

While expressing support for Maliki's government, the US has stressed the need for a political solution to the crisis. Maliki's opponents accuse him of sidelining Sunnis, which fuelled resentment that fed the insurgency.

In the face of the mounting security crisis, Washington on Sunday ordered military personnel to boost security for its diplomatic staff in Baghdad and said some staff were being evacuated from the embassy as the Iraqi government battled to hold off insurgents.

The US is also considering holding discussions with Iran on ways to push back Sunni militants in Iraq, a senior official said on Sunday, in what would mark a major step in US engagement with its longtime adversary.

A White House official cautioned no discussions had yet taken place, saying: "There has been no contact with Iran on this issue thus far, nor do we have any plans to preview."

Iran has held out the prospect of working with the US to help restore security in Iraq.

Tal Afar had been defended by an unit of Iraq's security forces commanded by a Shi'ite major general, Abu Walid, whose men were among the few holdouts from the government's forces in the province around Mosul not to flee the rapid ISIL advance.

After sweeping through towns in the Tigris valley north of Baghdad, ISIL fighters appear to have halted their advance outside the capital, instead moving to tighten their grip on the north.

Most of the inhabitants of Tal Afar are members of the Turkmen ethnic group, who speak a Turkic language. Turkey has expressed concern about their security.

The Turkmen and other residents of Tal Afar are divided among Sunnis and Shi'ites in a part of Iraq with a complex ethnic and sectarian mixture. The city is just outside Iraq's autonomous Kurdish region, whose own security forces have taken advantage of the collapse of government control to advance into the city of Kirkuk and rural areas with oil deposits.

ISIL fighters aim to establish a caliphate on both sides of the Syria-Iraqi frontier based on strict medieval Sunni Muslim precepts. Their advance has been assisted by other Sunni Muslim armed groups.

'CRAZY FIGHTING'

US President Barack Obama has said he is reviewing military options, short of sending troops, to combat the insurgency.

The Pentagon said in a statement a small number of defense personal "are augmenting State Department security assets in Baghdad to help ensure the safety of our facilities."

A US military official said fewer than 100 people would be involved, including Marines and other soldiers.

In a new warning to Americans against all but essential travel to Iraq, the State Department said: "The US government considers the potential threat to US government personnel in Iraq to be serious enough to require them to live and work under strict security guidelines."

The vast US mission is the largest and most expensive embassy ever built anywhere in the world, a vestige of the days when the United States had 170,000 troops in Iraq battling to put down a sectarian civil war that followed its invasion.

Iraq now faces the prospect of similarly vicious warfare, but this time with no US forces on the ground to intervene. Its million-strong army, trained and armed by Washington at a cost of around $25 billion, has been plagued by corruption, poor morale and a perception it pursues Shi'ite sectarian interests.

Residents in Tal Afar said Shi'ite police and troops rocketed Sunni neighbourhoods before the ISIL forces moved in and finally captured the city. A member of Maliki's security committee told Reuters government forces had attacked ISIL positions on the outskirts of the city with helicopters.

"The situation is disastrous in Tal Afar. There is crazy fighting and most families are trapped inside houses, they can't leave town," a local official said on Sunday before the city was overrun. "If the fighting continues, a mass killing among civilians could result." - Reuters