BAGHDAD: Iraqi forces said they fought off an overnight attack by Islamic State militants near the city of Ramadi, which the insurgents overran at the weekend in the most significant setback for the government in a year.

Islamic State is seeking to consolidate its gains in the vast desert province of Anbar, of which Ramadi is capital, where only pockets of territory remain under government control.

The IS advance has exposed the shortcomings of Iraq's army and the limitations of U.S. air strikes.

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Government forces backed by militias have meanwhile been building up at a base near Ramadi in preparation for a counterattack to retake the city, where Islamic State forces have taken over tanks and artillery and large amounts of ammunition abandoned by fleeing Iraqi forces.

The Anbar police chief, Kadhum al-Fahdawi, said reinforcements were arriving as Iraqi forces dug in.

There was however no indication that the counterattack was imminent.

Ramadi was Islamic State's biggest success since it captured the northern city of Mosul last year and declared itself an Islamic caliphate.

While it has been forced to give ground in Tikrit, Saddam Hussein's home town, and in the Syrian city of Kobani, the group still controls large areas of Iraq and Syria.

In Syria, Islamic State made further advances, seizing around a third of the ancient city of Palmyra on Wednesday, the Syrian Observatory for Human Rights monitoring group said.

The city is home to a UNESCO World Heritage site and Syria's antiquities chief has said the insurgents would destroy ancient ruins if they took control of it.

But in northeastern Syria, Kurdish forces and United States-led air strikes have killed at least 170 Islamic State members this week, a Kurdish official and the Observatory said.

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Sectarian fears

There are fears in Washington and elsewhere that the fighting in Iraq will become a polarising clash between Shias and Sunnis as Iraqi Prime Minister Haider al-Abadi, a Shia, becomes increasingly dependent on the allegedly Iranian-backed Shia militias to step in where the Iraqi military has failed.

Islamic State fighters attacked government forces in the town of Husaiba al-Sharqiya, about halfway between Ramadi and the Habbaniya military base where militia fighters have assembled, police and pro-government forces said.

“Daesh (Islamic State) attacked us around midnight after a wave of mortar shelling on our positions,” Amir al-Fahdawi, a leader of the pro-government Sunni tribal force in the area, told Reuters on Wednesday.

“This time they came from another direction in an attempt to launch a surprise attack, but we were vigilant and, after around four hours of fighting, we aborted their offensive,” he added.

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The Habbaniya base is midway between Ramadi and the town of Fallujah, which has been under Islamic State control for more than a year and is 50 kilometres from the Iraqi capital.

Islamic State appears to be trying to join up Ramadi and Fallujah by taking territory between the two towns.

“They want to occupy more of Anbar,” said Sabah Karhout, head of the Anbar provincial council.

"Their primary aim is to connect Ramadi to Fallujah.”

As pressure mounted for action to retake Ramadi, a local government official urged citizens to join the police and the army to join what Shi'ite militiamen have said will be the “Battle of Anbar”.

Islamic State fighters have set up defensive positions and laid landmines, witnesses in Ramadi said. The group's black flags are flying over the main mosque and other buildings.

The White House said a US-led air campaign would back Iraqi forces in their attempt to regain Ramadi, whose fall exposed the limits of US air power in its battle against the radical Sunni Islamic State in both Iraq and Syria.

Hasty retreat

Abadi's decision to send in the militia, known as Hashid Shaabi or Popular Mobilisation, to try to retake the predominantly Sunni city of Ramadi could stir up further sectarian hostility in one of the most violent parts of Iraq.

Local officials say 500 people were killed in the fighting to take Ramadi and the international migration agency says more than 40,000 people have fled the city.

When the Iraqi forces beat a hasty retreat from Ramadi at the weekend, they left behind a large amount of military supplies, including about a half a dozen tanks, around 100 wheeled vehicles and some artillery, the Pentagon said.

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A Pentagon spokesman said it would have been preferable if the Iraqi troops had destroyed the equipment before leaving.

An Iraqi army officer who commanded an armoured regiment in Ramadi said the militants had seized a depot that held enough ammunition to sustain Islamic State for months.

“The consequences of seizing the ammunition storage in Ramadi will be much worse than seizing the city itself,” the officer said, speaking on condition of anonymity.

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