Shi'ite paramilitaries were preparing to deploy to Iraq's western province of Anbar on Monday after Islamic State militants overran the provincial capital Ramadi in the biggest defeat for the Baghdad government since last summer.

A spokesman for the paramilitaries, which are known as Hashid Shaabi, told Reuters they had received orders to mobilise, but details could not be revealed for security reasons.

"Now that the Hashid has received the order to march forward, they will definitely take part," said Ali Al-Sarai, a member of the Hashid Shaabi's media wing. "They were waiting for this order and now they have it."

Ramadi is dominated by Sunni Muslims. Prime Minister Haider Al-Abadi signed off on the deployment of Shi'ite militias to attempt to seize back the area, a move he had previously resisted for fear of provoking a sectarian backlash.

About 500 people have been killed in the fighting for Ramadi in recent days and between 6,000 and 8,000 have fled, a spokesman for the provincial governor said.

The city's fall marked a major setback for the forces ranged against Islamic State: a US-led coalition and the Iraqi security forces, which have been propped up by Iranian-backed Shi'ite militias.

It was also a harsh return to reality for Washington, which at the weekend had mounted a successful special forces raid in Syria in which it said it killed an Islamic State leader in charge of the group's black market oil and gas sales, and captured his wife.

While the Iraqi government and Shi'ite paramilitaries recaptured the city of Tikrit from Islamic State last month, the major northern city of Mosul remains under the control of the Islamists.

Islamic State said that in Ramadi it had seized tanks and killed "dozens of apostates", its description for members of the Iraqi security forces.

Earlier, security sources said government forces evacuated a military base after it came under attack by the insurgents, who had already taken one of the last districts still holding out.

It was the biggest victory for Islamic State in Iraq since security forces and Shi'ite paramilitary groups began pushing the militants back last year, aided by air strikes from a US-led coalition.

TARGET OF OPPORTUNITY

US Secretary of State John Kerry expressed confidence that the Islamic State takeover of Ramadi would be reversed in the coming weeks.

He told a news conference in Seoul that Ramadi had been a target of opportunity for the Islamist militants.

"I am convinced that as the forces are redeployed, and as the days flow in the weeks ahead, that's going to change, as overall (they) have been driven back ... I am absolutely confident in the days ahead that will be reversed."

The US Defense Department tried to play down the impact on the broader Iraq military campaign of an Islamic State seizure of the city.

"Ramadi has been contested since last summer and ISIL now has the advantage," Pentagon spokeswoman Elissa Smith said, using an acronym for Islamic State. She said the loss of the city would not mean the overall Iraq military campaign was turning in Islamic State's favour, but acknowledged it would give the group a "propaganda boost".

"That just means the coalition will have to support Iraqi forces to take it back later," Smith said, adding that the US was continuing to provide them air support and advice.

The Iraqi government had vowed to liberate Anbar after routing the militants from Tikrit. But the security forces, which partly disintegrated under an Islamic State onslaught last June, have struggled to make progress in the vast desert province.

An officer who withdrew from the besieged army base said the militants - known in Arabic as Daesh - were urging them via loudspeaker to discard their weapons, promising to show mercy in return.

"Most of the troops withdrew from the operations command headquarters and Daesh fighters managed to break in from the southern gate," the officer said. "We are retreating to the west to reach a safe area".

"TOTAL COLLAPSE"

Earlier on Sunday, Anbar provincial council member Athal Fahdawi described the situation in Ramadi as "total collapse".

It was one of only a few towns and cities to have remained under government control in the desert terrain, which borders Saudi Arabia, Syria and Jordan.

Islamic State, which emerged as an offshoot of Al Qaeda, controls large parts of Iraq and Syria in a self-proclaimed caliphate where it has massacred members of religious minorities and slaughtered Western and Arab hostages.

A senior Israeli intelligence official said that before US-led coalition forces began operations against the group, its revenues were running at about $65 million a month, more than 90 per cent of which came from its oil business and the rest from locally imposed taxes and ransom money.

Since then, monthly revenues had fallen to about $20 million, of which about 70 per cent is from oil and the rest from taxes and ransom.

The US and its allies have been pounding the militants for months with air strikes in Iraq and Syria. In the 24 hours up to 0500 GMT (0100 EDT) on Sunday, the US-led coalition carried out seven air strikes near Ramadi. - Reuters