Parliament had called a special session Sunday to try to reach agreement on a bill authorizing elections in all 18 Iraqi provinces - a move the United States considers essential to reconciling Iraq's rival ethnic and religious communities.
But the session never convened because intensive talks among party and legislative leaders were unable to produce agreement on a formula that would satisfy Arab, Kurdish and Turkoman demands for governing Kirkuk.
Kurds consider Kirkuk their traditional capital and want to incorporate it into their self-ruled region of the north. Arabs and Turkomen want the city to remain under central government control.
Last month, parliament approved an election bill after Kurdish lawmakers walked out in protest. But President Jalal Talabani, a Kurd, rejected the bill and sent it back to parliament.
With the elections bill held hostage over Kirkuk, U.S. officials have been stepping up pressure on the Kurds and other groups to resolve their differences so the provincial balloting can take place this year.
U.S. Ambassador Ryan Crocker and U.N. special representative Staffan de Mistura met late Sunday with Prime Minister Nouri al-Maliki and other top leaders to try to hammer out an agreement that could be submitted to parliament.
President Bush telephoned the Sunni parliamentary speaker Mahmoud al-Mashhadani and Shiite Vice President Adel Abdul-Mahdi to urge a resolution, according to statements Sunday from their offices.
"President Bush has been working with the Iraqis to encourage them to work out their differences and get the provincial elections law passed," said White House press secretary Dana Perino.
The United Nations has recommended postponing provincial elections in Kirkuk and surrounding Tamim province while allowing the vote to proceed in Iraq's other 17 provinces. A committee would make recommendations on how to govern Kirkuk by the end of the year.
A senior parliamentary official said lawmakers were leaning toward approving the U.N. proposal, but Sunni Arabs and Turkomen were seeking international guarantees. He spoke on condition of anonymity because of the sensitivity of the negotiations.
The issue of Kirkuk, the center of Iraq's vast northern oil fields, has emerged as a litmus test for the ability of Iraq's ethnic and sectarian leaders to compromise on critical issues in the interest of national reconciliation.
The Kurds control the current provincial council, which would be up for re-election in a new ballot. Arabs and Turkomen have called for a quota system for council seats to guarantee representation of all communities - a demand the Kurds reject.
"The struggle in the country is now turning from a sectarian to an ethnic one due to the Kurdish behavior, which poses a danger on the country," said Dhafir al-Ani, a Sunni Arab lawmaker. "There are efforts and wishes to end this crisis but they always fail due to the obstinacy of the Kurdish parties that want to annex Kirkuk at any price."
Issues such as Kirkuk underscore U.S. fears that the improved security in Iraq is fragile because Iraqi leaders have failed to exploit the drop in violence to reach long-term political and power-sharing agreements.
U.S. officials fear that al Qaeda in Iraq, a Sunni group, and Shiite extremist organizations may seek to exploit lingering social tensions to undermine security gains.
Residents of Kirkuk fear that if lawmakers fail to reach agreement, tension could rise in the city, where a suicide bomb attack killed 25 people last week during a Kurdish protest.
"I hope they can reach a solution that fits all parties and prevents the situation from deteriorating further," said Yelman Ayad, a 59-year-old Turkoman who sells spare car parts in Kirkuk.
"The mistakes of politicians brought us to this stage. Our social fabric was torn up in Kirkuk, and this is very dangerous for all of Iraq," Ayad said.