KIRKUK, Iraq - Muhammad Ahmed realized how wide the chasm between Kurds and Arabs here had grown when he recently ran into a former classmate on the serpentine streets of this troubled city.
Mr. Ahmed, a Kurd, and his friend, an Arab, had studied together at Kirkuk's oil institute nearly two decades ago. But shortly after Mr. Ahmed started work at the state-owned North Oil Company in the late 1980's, the government of Saddam Hussein, intent on solidifying Arab control of Kirkuk, forced him out of his job and made him and his family move north, where they joined tens of thousands of other Kurds exiled from this city.
That mass relocation planted the seeds for a bitter ethnic antagonism that has grown into the most incendiary political issue in Iraq outside of the Sunni-led insurgency, and the one that more than any other is delaying formation of a new government. When Mr. Ahmed met his classmate again, he discovered his friend was still working for North Oil, one of as many as 10,000 employees helping to tap the region's vast troves of oil, estimated at 10 to 20 percent of the country's reserves.
"He had a great salary and a good job all these years," said Mr. Ahmed, 41, musing on the luxuries of his old friend's house. "Arabs, Turkmen and Christians were hired, and Kurds were not." He spoke from his own home: a cinder-block building hastily erected in a squatter camp inside the city's soccer stadium, where he and his family have been living alongside thousands of other returning Kurds since the fall of Mr. Hussein's rule. "We wish we didn't have oil in Kirkuk," he said. "If the oil wasn't here, we'd have a comfortable life now. All our problems are because of this damned oil."
Mr. Ahmed's plight encapsulates the growing struggle over Kirkuk, a drab city of 700,000 on the windswept northern plains. Efforts to restore Kurds to their jobs and property without disenfranchising Arabs are fraught with the possibility of igniting a civil war. The debate has so inflamed passions that Kurdish and Shiite Arab negotiators trying to form a coalition government in Baghdad may have to put off any real decision on Kirkuk's future.
"As far as Kirkuk is concerned, because of the different ethnic groups in it, we have to apply a permanent solution, not a temporary solution," Ibrahim al-Jaafari, the Shiite nominee for prime minister, said.
Kurdish leaders call Kirkuk their Jerusalem, saying they should control it - and its oil fields - because it was historically Kurdish. The Kurds are pushing Shiite leaders like Dr. Jaafari to help quickly give property back to Kurdish returnees, evict Arab settlers and employ more Kurds at North Oil, the only major government institution here that the Kurds have been unable to dominate since the American invasion.
The Kurdish political parties have huge leverage. Kurds turned out in large numbers to vote on Jan. 30, securing more than a quarter of the seats in the 275-member national assembly and making themselves a necessary partner for the Shiite bloc that won the largest number of seats.
But with the oil in Kirkuk at stake, the Kurdish and Shiite parties have been unable to agree on how to carry out Article 58 of the interim constitution, which provides vague guidelines for settling the property disputes here. Equally vexing is the question of who will administer Kirkuk - the national government or the autonomous regional government of Iraqi Kurdistan.
In the 1960's, Baath Party officials began packing Kurds and, to a lesser degree, Turkmen into trucks and evicting them from Kirkuk. As the displacement continued, the Kurds who worked for North Oil, like Mr. Ahmed, rose to the top of the relocation list. The government, dominated by Sunni Arabs, imported mostly Shiite Arabs from the impoverished south into the Kirkuk area.
Kurds began returning in large numbers nearly two years ago, when the Hussein government was toppled. Some Arab families fled, but most heeded the reassurances of American soldiers who, trying to avert an ethnic war, urged them to stay and urged the Kurds to await a legal solution.
"From my perspective, the Arab settlers who were brought into Kirkuk were also victims of Saddam Hussein," said Barham Salih, the deputy prime minister and a top Kurd. "But the question is, if we're talking about a new Iraq, does this mean the elite of Iraq, the democratically elected elite of Iraq, are willing to acknowledge the terrible mistake that was made and put it right?"
In April 2004, the Americans created the Iraqi Property Claims Commission to rule on restitution. By the end of 2004, the commission had received 10,044 claims from Kirkuk's province, Tamin. The commission's statistics show that judges have decided only 25 cases.
The head of the commission said in an interview that only two judges, both Kurds, were working on cases in Kirkuk. The commission has been unable to assign more judges because Kurdish political parties insist that only Kurds review the claims, limiting the number of qualified people, said the commission head, who declined to be identified by name because one colleague had been assassinated and another kidnapped.
Turkmen and Arab officials here accuse the major Kurdish parties of having moved people pretending to be returnees into Kirkuk before the Jan. 30 elections in order to bolster the Kurdish vote. The main Kurdish coalition won 26 of 41 provincial council seats, and a Kurd will almost certainly be installed as governor.
Each ethnic group claims demographic dominance, but no reliable census has been taken since 1957. Mutual suspicions are intense.
"The families who were kicked out of Kirkuk had homes in Kirkuk," said Suphi Sabir, a senior official in the Iraqi Turkmen Front. "If these people were from Kirkuk, why did they not return to their homes? Why are they staying in the stadium?"
In the Kirkuk neighborhood of Qadisiya, from which Kurds were evicted in large numbers, a group of Arab men said on a recent afternoon that the city would remain peaceful - as long as no one tried to seize their homes.
"Those people are not from Kirkuk," a tall man in a dark blue robe, Muhammad Awad, said of the Kurds. "They came from Turkey and Iran. They're not Iraqis. Maybe the old regime kicked out 1 or 2 percent of the Kurds, but those people came from outside the country."
At the stadium, one glance at Mr. Ahmed's home shows why he has grown so impatient. Water runs along the floor when it rains. Children rummage in garbage barrels outside. A small kerosene heater is the sole source of warmth, and a television set the only entertainment.
Insurgents attack the stadium every week or two. On election day, a rocket landed near Mr. Ahmed as he stood outside his home, decapitating a 16-year-old named Yusef.
"We are willing to pay with our blood, like water on the floor, because Kirkuk is a Kurdish city and should stay part of Kurdistan," said Yusef's mother, Sabrir Kareem Muhammad, as her husband kissed a photo of their son.
About 440 families live in the stadium, at least 100 more than a year ago, said Ismail Ibrahim, an unofficial mayor of the camp. Thousands of other Kurdish returnees are living in dozens of sites in and near Kirkuk, local officials say, scattered in dirt fields, abandoned government buildings and former military barracks. Many returnees started off in tents, but this winter built spartan cinder-block or mud-and-brick homes.
"Nobody is supporting us," Shakur Ahmed, 44, said as he sat on Mr. Ibrahim's floor. "Baathists are still occupying our land."
For many Kurds, employment at the oil company is as important as winning back their property. But securing jobs there is not easy, either. Muhammad Ahmed, who worked as a supervisor of oil pumps and turbines for 10 months before he was relocated, said he was among 180 experienced Kurds who recently applied together for jobs at North Oil. Mr. Ahmed had an interview two months ago, he said, but has heard nothing.
A senior official at the Oil Ministry said he had sent to North Oil nine lists of people, half of them Kurds, who should be given jobs.
The Kurds complain that they have seen little or no results. "It's chauvinism," Mr. Ahmed said. "They don't want Kurds to work in oil. It's the same as under Saddam's plan."
On the edge of the city, out of sight of the stadium, the flames from oil processing plants leaped into the sky in the gathering dusk, the brightest light for miles around.