The unusual direct strike coincides with a potential turning point in the Middle East balance of power, as talks to revive an Iranian nuclear deal face possible collapse and heightened risks of war in the Gulf, while in Baghdad, Iraqi leaders are trying to form a new government shorn of Iranian influence.

Both developments, some regional analysts say, help explain why Iran chose this moment to exhibit its readiness to use ballistic missiles, long prized by Tehran as a deterrent against the United States, Israel and Gulf Arab states that contest Tehran's regional sway.

The decision by Iran's Revolutionary Guards Corps (IRGC) to fire the projectiles directly into territory controlled by the U.S.-friendly Kurdish regional government - and to declare the attack - is a departure from Iran's normal procedure of applying military pressure through proxy militias. L2N2VF0JB 5N2N72Q8]

The missiles hit near a building which the U.S. consular team in Erbil, Kurdistan's autonomous regional capital, is due to move to. It caused no U.S. casualties and hurt one civilian.

The IRGC said the attack was aimed at Israeli "strategic centres" and was retaliation for an Israeli air raid that killed two of its members in Syria last week.

The Baghdad government did not respond to Reuters questions about what Israeli sites the IRGC was referring to. There was no immediate response from the Iranian embassy in Baghdad to a Reuters request for comment on the IRGC's mention of Israeli strategic centres. The Erbil government denied there are any Israeli sites in its territory.

The Israeli killing of IRGC members in Syria was likely the trigger for the Erbil attack, but the assault was also a warning to the United States and its Arab Gulf partners, as well Iraqi leaders who are threatening to form a government that excludes Tehran's chief allies in Baghdad, officials and experts said.

"You've got three things going on here," said Professor Toby Dodge of the London School of Economics.

"There's the JCPOA (Iran nuclear deal), tit-for-tat fighting between Iranians, Israelis and the U.S., and now Iraqi government formation. So you're sending a series of messages."

An Iran-aligned Iraqi militia commander insisted Israel was the prime target, but acknowledged that the message being sent could be broader - and a clear sign that Iran was willing to escalate if it felt threatened.

"It's a message to Israel and to all countries that any attack, they will respond to with missiles," and not just via proxies, said the commander who asked not to be named because he is not authorised to speak to the media.

PROXIES

Israel has ramped up its attacks against the IRGC and its proxies in the region with at least 15 air raids in Iran's regional ally Syria in the past year, nine of which were carried out in the last four months, according to a Reuters tally.

Iran-backed Iraqi militia groups have regularly attacked U.S. targets in recent years, including its force of some 2,000 troops deployed across Iraq and Syria to fight remnants of Islamic State, with increasingly sophisticated attacks.

Washington's own actions have included its assassination of fabled Iranian general Qassem Soleimani in Baghdad in 2020. Iran responded to that killing with a missile salvo on a U.S. base in Iraq, its last known direct attack against the United States.

Tehran's talks with Washington to revive a 2015 nuclear deal, which would bring much needed sanctions relief, have been plunged into uncertainty by a last-minute Russian demand.

Their collapse could mean Tehran moving closer to developing nuclear weapons if it chose to, a prospect that would plunge the region into turmoil. Tehran denies it ever sought atomic bombs.

Iran is widely believed to have applied military pressure for leverage around previous rounds of talks and said on Monday it was up to Washington to resuscitate a deal.

"Were the Iranians thinking about all those factors when they decided to launch the missiles? I'm not so sure about that - the Israel incident was the trigger," said Lahib Higel, senior Iraqi analyst at the International Crisis Group.

"But there are a lot of other factors at play ... like Russia putting demands on the JCPOA," Higel said.

IRAQI SHI'ITE RIVALS

Inside Iraq, Iran's adversaries have taken the strike as a warning to themselves in the midst of sensitive talks over the formation of a government following an October general election.

That election handed a victory to powerful cleric Moqtada al-Sadr, a Shi'ite Muslim leader who opposes Iranian influence and is the chief rival to fellow Shi'ites aligned with Iran.

Sadr has threatened to exclude Iran-backed groups from government, and has forged an alliance with the Kurdish Democratic Party that runs Erbil, as well as Sunni Arab groups.

Sadr issued a statement on Twitter on Sunday saying Iraq's Kurds were the target of the Erbil attack, and vowed to pursue his "national majority government" - a euphemism for a government free of Iranian influence.

A senior official from Sadr's political office said Sadr's plans would effectively exclude Iranian Shi'ite allies from government for the first time since the U.S. invasion of 2003 that toppled Saddam Hussein.

"The missiles were a message to Sadr warning against breaking with other Shi'ites and aligning yourself with a side that has relations with Israel," the official said, referring to the Kurds who have kept discreet ties with Israel for decades.

The official spoke on condition of anonymity because Sadr's movement has ordered that no one speak to media during government talks.

Dodge said Iran's message was bold but risky and that Iraq would bear the brunt of any further violence. Iran's adversaries would seek to retaliate against Tehran or its proxies, he said.

"You get into this tit-for-tat again. Whatever happens next it's more instability for Iraq."