Iraq's highest court ruled on Monday that Shi'ite Prime Minister Nuri Al-Maliki's bloc is the biggest in parliament, meaning he could retain his position, state television reported.

The president, according to the constitution, must now ask Maliki to form a new government in Iraq, which is facing a major challenge from Islamic State Sunni insurgents and widepread sectarian bloodshed.

Maliki, serving in a caretaker capacity since an inconclusive election in April, has defied calls from Sunnis, Kurds, some fellow Shi'ites and regional power broker Iran to step aside to make room for a less polarising figure.

The court's decision is "very problematic", said a senior Iraqi official. "This will make the situation very, very complex," said the official, who asked not to be named due to sectarian sensitivities in Iraq.

Critics say Maliki is a sectarian and authoritarian ruler who can be compared to Saddam Hussein, the man he plotted against from exile for years.

The United States, which was key to Maliki taking office as an unknown in 2006, has also suggested it is time for him to go.

On Sunday night, police said special forces loyal to Maliki were deployed in strategic areas of Baghdad after he delivered a tough speech on television accusing Iraq's Kurdish president of violating the constituion by missing a deadline to ask the biggest bloc in parliament to nominate a prime minister. - Reuters