Iraqi Kurds report that government forces and Shia militias have attacked the Peshmerga in the northern city of Kirkuk, causing "lots of casualties."  The disputed multi-ethnic city is claimed by the Kurds, but the Iraqi government can't afford to let it go.  Kirkuk is a vital oil center and source of considerable revenue for the Iraqi government.

The government was responding to the recent referendum on independence held by the Kurds – a vote that was opposed by the Iraqi government.

CBS News:

The Kurdistan Region Security Council said in a statement that the peshmerga have destroyed at least five U.S.-supplied Humvees being used by the state-sanctioned militias following the "unprovoked attack" south of the city.

Brig. Gen. Bahzad Ahmed, a spokesman for Kurdish forces, said federal forces had seized an oil and gas company and other industrial areas south of Kirkuk in fighting with Kurdish forces that caused "lots of casualties," without providing a specific figure.

He said Iraqi forces have "burnt lots of houses and killed many people" in Toz Khormato and Daquq, south of the disputed city. His claims could not be independently verified.

Iraq's Interior Ministry said in a brief statement that federal forces had taken control of a power plant, a police station and industrial areas near Kirkuk. It provided no further details on the fighting or casualties in what it referred to as Operation Impose Security on Kirkuk.

The Reuters news agency quoted two Iraqi military commanders as saying they had no orders to enter Kirkuk, but that state forces were working to "secure the surroundings" of the northern city.        

Tensions have soared since the Kurds held a non-binding referendum last month in which they voted for independence from Iraq. The central government, along with neighboring Turkey and Iran, rejected the vote.

It is significant that government forces are concentrating on securing oil facilities rather than entering the city itself.  This shows pretty clearly where their priorities lie and also reflects a cautious approach to trying to hold their country together.

The U.S. forces in the region are trying to keep a lid on the situation:

U.S. Army Col. Ryan Dillon, a spokesman for the U.S.-led coalition, tweeted that it was "closely monitoring sit. near Kirkuk; urge all sides to avoid escalatory actions. Finish the fight vs. #ISIS, biggest threat to all."

On Friday, before fighting began in earnest, U.S. Secretary of Defense James Mattis noted that American troops were working on the ground with the Iraqi forces, and told reporters the U.S. was "working too to make certain we keep any potential for conflict off the table."

"we're trying to tone everything down and figure out how to go forward without losing on sight on the enemy and at the same time recognizing that we've got to find a way to move forward. Geography's not going to change. They're going to be alongside each other no matter what. So we've got to work on this," Mattis said.

In the end, Mattis is right. Kirkuk is technically not part of the autonomous Kurdish region, although the Peshmerga occupied the city in 2014 when ISIS was rampaging through the rest of the country.  But the Iraqi government has been notoriously reluctant to share oil revenue equally with the Kurds, leading to tensions and now open conflict.

No matter what happens with Kurdish independence, the Kurds are not going to maintain full control over Kirkuk.  But they can certainly keep troops there as a bargaining chip in order to get a better deal on oil revenue from the central government.  That appears to be the endgame for both sides, at least until the central government can turn its full attention to dealing with its Kurdish problem.