Kurdistan had warned it would stop oil shipments again at the start of September over the payments, but two Kurdish sources said the region had decided to give Baghdad more time for payment paperwork to be sorted out.

"We decided to extend the deadline for pumping crude to September 15 as a goodwill gesture, and to give Baghdad more time to resolve the payment issue," one source with Kurdistan's natural resources ministry told Reuters.

The extension signaled tensions were easing in Baghdad's long-running feud with Kurdistan over oil rights, territory and power-sharing, a dispute that is testing the country's uneasy federal union.

In April Kurdistan halted exports, saying Baghdad had not made payments to companies working there, but it restarted shipments on August 7 with a warning they could be halted again in a month if there were no payments.

Iraq says Kurdistan's oil shipments have fluctuated around 100,000 to 120,000 barrels per day since they restarted, below the 175,000 bpd that Baghdad says was agreed with Kurdistan.

"We want to send a message to Baghdad that we in Kurdistan are keen to help boost Iraq's exports. If the reply on the message was positive, then we will increase export levels from the region," the source said.

Iraq approved a payment of close to $560 million to oil producers operating in the north in return for their investment costs to develop oilfields in the Kurdish region. But officials are still waiting for the go-ahead.

Kurdish authorities say due payments that should be approved by central government could reach $1.5 billion, two Kurdish sources said.

POSITIVE SIGNS?

Kurdish oil exports make up a fraction of Iraq's shipments, but the payment dispute feeds into a wider conflict between Iraqi Arabs and Kurds over autonomy, oil and land that risks upsetting Iraq's fragile sectarian balance.

Kurdistan is ready to restart talks with Baghdad to end the crisis by agreeing a long-delayed oil law to hand regions more say in managing energy resources, Iraq's Deputy Prime Minister Rosh Nuri al-Shawish, a Kurd, said on Wednesday.

The positive tone from Shawish signaled the Shi'ite-led central government and self-governed Kurdistan may be edging towards resolving their disagreements.

The dispute is part of a broader political crisis in Iraq, where a fragile power-sharing arrangement between Shi'ite, Sunni and Kurdish blocs is struggling to overcome deep splits.

Autonomous since 1991, Iraq's Kurdistan runs its own government and armed forces, but relies on the central government for its percentage of the country's oil revenues from the national budget.

Iraq, a member of the Organization of the Petroleum Exporting Countries (OPEC), has the world's fourth-largest oil reserves, and is seen as a major source of new oil.

(Editing by Barry Malone and Mark Potter)

• A Permanent Economic Emergency