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Speaking at a news conference after a meeting with his top national security advisers, Obama said he was prepared to take "targeted" military action later if deemed necessary, thus delaying but still keeping open the prospect of US air strikes against a militant insurgency. But he insisted that US troops would not return to combat in Iraq.
Obama urged the Shi'ite government of Prime Minister Nuri al-Maliki to take urgent steps to heal the sectarian rift, something US officials say the Iraqi leader has failed to do so far and which an al Qaeda splinter group leading the Sunni insurgency has exploited.
"We do not have the ability to simply solve this problem by sending in tens of thousands of troops and committing the kinds of blood and treasure that has already been expended in Iraq," Obama told reporters. "Ultimately, this is something that is going to have to be solved by the Iraqis."
Obama, who withdrew US troops from Iraq at the end of 2011, said the United States would significantly increase support for Iraq's beleaguered security forces, including sending up to 300 military advisers. But Obama stopped short of acceding to Baghdad's request for the use of US air power.
Senior US lawmakers have called for Maliki to step down, and Obama administration officials have also made clear their frustration with him.
While Obama did not join calls for Maliki to go, saying "it's not our job to choose Iraq's leaders," he avoided any expression of confidence in the embattled Iraqi prime minister when asked by a reporter whether he would do so.
In the meantime, the United States began flying F-18 attack aircraft from the carrier George H.W. Bush on missions over Iraq to conduct surveillance of the insurgents. The carrier was ordered into the Gulf several days ago.
The sprawling Baiji refinery, 200 km (130 miles) north of the capital near Tikrit, was a battlefield as troops loyal to the Shi'ite-led government held off insurgents from the Islamic State of Iraq and the Levant (ISIL) and its allies who had stormed the perimeter a day earlier, threatening national energy supplies.
A government spokesman said around noon (0900 GMT) that its forces were in "complete control."
But a witness in Baiji said fighting was continuing. Two Iraqi helicopters tried to land in the refinery but were unable to because of insurgent gunfire, and most of the refinery remained under rebel control.
A day after the government publicly appealed for US air power, there were indications Washington is sceptical of whether that would be effective, given the risk of civilian deaths that could further enrage Iraq's once-dominant Sunni minority.
Turkish Prime Minister Tayyip Erdogan, a NATO ally, said the United States "does not view such attacks positively," given the risk to civilians. A Saudi source said that Western powers agreed with Riyadh, the main Sunni state in the region, that what was needed was political change, not outside intervention, to heal sectarian division that has widened under Maliki.
Video aired by Al-Arabiya television showed smoke billowing from the Baiji plant and the black flag used by ISIL flying from a building. Workers who had been inside the complex, which spreads for miles close to the Tigris River, said Sunni militants seemed to hold most of the compound in early morning and that security forces were concentrated around the refinery's control room.
The 250-300 remaining staff were evacuated early on Thursday, one of those workers said by telephone. Military helicopters had attacked militant positions overnight, he added.
Baiji, 40 km (25 miles) north of Saddam Hussein's home city of Tikrit, lies squarely in territory captured in the past week by an array of armed Sunni groups, spearheaded by ISIL, which is seeking a new Islamic caliphate in Iraq and Syria. On Tuesday, staff shut down the plant, which makes much of the fuel Iraqis in the north need for both transport and generating electricity.
ISIL, which considers Iraq's Shi'ite Muslim majority as heretics in league with neighbouring, Shi'ite Iran, has led a Sunni charge across northern Iraq after capturing the major city of Mosul last week as Maliki's US-armed forces collapsed.
The group's advance has only been slowed by a regrouped military, Shi'ite militias and other volunteers. The government announced on Thursday that those who joined up to fight in "hot areas" would be paid about $150 a week.
Sunni fighters took the small town of Mutasim, south of Samarra, giving them the prospect of encircling the city which houses a major Shi'ite shrine. A local police source said security forces withdrew without a fight when dozens of vehicles carrying insurgents converged on Mutasim from three directions.
ISIL, whose leader broke with al Qaeda after accusing the global jihadist movement of being too cautious, has now secured cities and territory in Iraq and Syria, in effect putting it well on the path to establishing its own well-armed enclave that Western countries fear could become a centre for terrorism.
The Iraqi government made public on Wednesday its request for US air strikes, 2-1/2 years after US forces ended the nine-year occupation that began by toppling Saddam in 2003.
Asked whether Washington would accede to that appeal, US Secretary of State John Kerry told NBC only that "nothing is off the table."