Iraqi Kurdish forces said they had recaptured the country's biggest dam from Islamic State militants on Monday, although an employee at the site said jihadist fighters still controlled key points on the vulnerable structure.

Hoshiyar Zebari - a Kurd who has been foreign minister in the outgoing Iraqi government - also said officials from his community would join talks on forming a new, inclusive administration considered vital for combating the Sunni Muslim militants who have overrun much of the country.

The Islamists' seizure of the Mosul hydroelectric dam in northern Iraq marked a stunning setback for Baghdad's Shi'ite-led authorities and raised fears the militants could cut power and water supplies, or even blow the shaky structure, causing huge loss of life and damage down the Tigris river valley.

Iraqi officials hailed what they said was a strategic victory in regaining control of the dam, and announced that the next objective would be to win back Mosul itself, the biggest city in northern Iraq which lies 40 km (25 miles) downstream.

However, any lingering threat to the dam from IS fighters would be like a gun to the city's head, holding it hostage.

Zebari said forces from the Kurds' autonomous region had captured the dam - blighted by structural problems since it was built by West German engineers for Saddam Hussein in the 1980s - with help from US air strikes nearby in a difficult operation.

"Taking the dam took longer than expected because the Islamic State had planted land mines," he told Reuters.

Baghdad officials expressed their determination to turn the tide against the Islamic State, whose campaign to create a regional caliphate has threatened to tear Iraq apart.

"The new tactic of launching a quick attack shrouded by secrecy proved successful and we are determined to keep following the new assault tactics with help of intelligence provided by Americans," Sabah Nouri, a spokesman for Iraq's counter-terrorism unit, told Reuters.

"The next stop will be Mosul."

An employee at the dam, however, contested the government's version of events. "Islamic State fighters are still in full control over the dam's facilities and most of them are taking shelter near the sensitive places of the dam to avoid air strikes," the employee told Reuters.

The employee gave no further details. However, engineers have repeatedly expressed concern about the state of the 3.5 km-wide (2.2 mile) dam since Saddam was overthrown in 2003.

A 2007 US Army Corps of Engineers report obtained by the Washington Post said the dam, which blocks the Tigris and holds 12 billion cubic metres of water, could flood two cities killing tens of thousands of people if it were destroyed or collapsed.

A wall of water could surge as far as Baghdad, 400 km away.

At the time, Iraqi officials described these warnings as alarmist and said measures were being taken to shore up the dam that has been weakened by cavities caused by soil being washed out. These holes need to be constantly refilled but it is unclear whether this work has continued under the militants.

KURDS WILLING TO TALK

Zebari said Kurdish officials would take part in negotiations on forming a new government, signalling the possibility of improved ties with the central administration.

Prime Minister Nuri al-Maliki stepped down last week after criticism that his policies, by favouring Shi'ites, had encouraged some members of the Sunni minority to join the Islamic State insurgency.

Haider al-Abadi, a fellow Shi'ite with a less confrontational reputation, has been appointed prime minister-designate to try to form a government including leaders of Iraq's main minorities. The aim is to form a united front to take on the Islamic State, which is accused of brutality and extreme violence. - Reuters