The Iraqi army launched an operation to retake Kurdish-held positions around the disputed oil city of Kirkuk on Friday amid a bitter row with the Kurds over a vote for independence last month.
A senior Kurdish official said thousands of heavily armed fighters had been deployed to resist the offensive "at any cost" and called for international intervention with the federal government in Baghdad to prevent the confrontation worsening.
The Iraqi army and the Kurdish peshmerga have been key allies of the US-led coalition in its fight against the Islamic State group and the threat of armed clashes between them poses a major challenge for Western governments.
Ethnically divided but historically Kurdish-majority Kirkuk is one of several regions that peshmerga fighters took over from the Iraqi army in 2014 when the jihadists swept through much of northern and western Iraq.
But Baghdad is bitterly opposed to Kurdish ambitions to incorporate the oil-rich province in its autonomous region in the north and has voiced determination to take it back.
"Iraqi armed force are advancing to retake their military positions that were taken over during the events of June 2014," the general told AFP by telephone, asking not to be identified.
He said that federal troops had already taken one base west of Kirkuk on Friday morning after peshmerga fighters withdrew during the night without a fight.
'Defend at any cost'
But a top aide to Iraqi Kurdish leader Massud Barzani vowed that peshmerga forces would defend their positions.
"Thousands of heavily armed peshmerga units are now completely in their positions around Kirkuk," Hemin Hawrami said.
"Their order is to defend at any cost."
The orders came after the Kurdish authorities accused the Iraqi government of massing forces in readiness for an offensive to seize Kurdish-held oil fields in the province.
They accused the Popular Mobilisation Forces (PMF) -- paramilitary units dominated by Iran-trained Shia militia -- of massing fighters in two mainly Shia Turkmen areas south of Kirkuk.
Hawrami urged the international community to intervene and call on Iraqi Prime Minister Haider al-Abadi to "order PMF to pull back if he can or if they listen to him".
"No escalation from our side. Just defend and roll them back if they attack," the senior Barzani adviser said.
The surge in tensions comes two weeks after Kurdish voters overwhelmingly backed independence in a non-binding referendum that the federal government condemned as illegal.
Polling was held in the three provinces that have long formed an autonomous Kurdish region as well as several other Kurdish-held areas, including Kirkuk.
Baghdad continues to reject decades-old Kurdish ambitions to incorporate the city and other historically Kurdish-majority areas in their autonomous region.
The Kurdistan Regional Security Council (KRSC) said that the Iraqi army and the PMF had been deploying tanks and heavy artillery to Bashir and Taza Khurmatu.
"These forces are approximately three kilometres from peshmerga frontline positions," it said.
"Intelligence shows intention to take over nearby oil fields, airport and military base," it added.
Kirkuk province is the location of northern Iraq's main oil fields and, even though far more crude is now pumped from the south, it is bitterly disputed between Baghdad and the Kurds.
On Thursday, Kurdish peshmerga closed the two main roads from Iraq's second city Mosul to the Kurdish cities of Arbil and Dohuk for several hours for fear of an attack in that area.
Abadi denied any attention of ordering an assault on his own people but the Kurds were unconvinced and accused the army's militia allies of trying to provoke a confrontation.
"We call on the Iraqi government to stop the PMF aggression in Kirkuk and north Mosul," the KRSC said. "Kurdistan continues calling for dialogue and peaceful means to settle differences."
The federal government severed ties between the Kurdish autonomous region and the outside world after the independence referendum by cutting international air links.
Neighbouring Turkey and Iran, which fear that Iraqi Kurdish moves towards independence could fuel demands from their own sizeable Kurdish communities, have also threatened to close their borders to oil exports.