By Missy Ryan

BAGHDAD, Aug 17 (Reuters) - Iraq is likely to abandon plans to sign up to $3 billion in short-term oil contracts, a U.S. diplomat said, putting in doubt deals that would give foreign oil firms their first major foothold in the country for decades.

"It appears that on present form (the Iraqi government) probably won't proceed with most of these or all of them," Charles Ries, coordinator for Iraq's economic transition at the U.S. embassy, told reporters in Baghdad on Sunday.

"But I think that some of the companies are open to continued discussions even on relationship grounds, and some of the companies ... don't think it's worth their time."

Iraq has been negotiating six no-bid, short-term technical support contracts with international oil firms, worth about $500 million each, which are aimed at quickly boosting production by a combined 500,000 barrels a day.

Like most oil-rich countries in the region, Iraq nationalised its oil industry in the 1970s. War and political instability have so far prevented international oil companies from returning since the fall of Saddam Hussein in 2003.

The government of Prime Minister Nuri al-Maliki is hoping to sign a host of new oil deals by next year that would provide global oil companies their first major commercial access to the OPEC member's fields in nearly four decades.

The first phase would have been the short-term deals, which should have been signed earlier this year but have been delayed in part due to disagreement over payment terms.

The deals involve Royal Dutch Shell (nyse: RDSA - news - people ) ; Shell in partnership with BHP Billiton (nyse: BBL - news - people ) ; BP (nyse: BP - news - people ) ; Exxon Mobil (nyse: XOM - news - people ) ; Chevron (nyse: CVX - news - people ) with Total ; and a consortium of smaller firms Anadarko , Vitol and Dome.

Ries said Anadarko and some of its partners had already walked away from talks over their deal, the first to apparently fall through.

He said the foreign firms were at best lukewarm to the idea of the short-term contracts which "were never going to be hugely lucrative," but some had been pursuing them in the hope of building a long-term relationship with Iraq's Oil Ministry.

The deals had also been criticised at home and abroad because they lacked competitive tenders, Ries said.

Oil Ministry officials, who have voiced frustration over the delays, were not immediately available for comment.

The short-term contracts were to be followed by far more valuable longer-term development contracts, for which dozens of foreign energy firms are expected to bid.

As the June 2009 deadline for finalizing those long-term contracts approaches, it has appeared more likely that the short-term bridge contracts could be discarded.

Iraqi officials have insisted they would not give preferential treatment in bids for long-term contracts to companies that participated in the short term deals.

YEARS OF DECAY

Iraq has proven reserves of 115 billion barrels, the world's third largest, but its production has been hurt by decades of sanctions and war. Maliki's U.S.-backed government is now looking to quickly boost its output with new investment.

Iraq now exports about 2 million barrels of oil per day, roughly the same amount as before the fall of Saddam Hussein.

Oil is not just the lifeblood of Iraq's economy -- providing 70 percent of GDP and over 90 percent of export earnings -- it will also be the engine for rebuilding its shattered infrastructure and providing desperately needed basic services.

Yet political feuding has hindered passage of an oil law needed to divvy up Iraq's vast oil wealth and allow bigger investment from foreign firms.

A draft version of the law was passed by the cabinet in early 2007, but since then the measure has been mired in disputes, such as a debate between Baghdad and the northern autonomous Kurdish region over who will control reserves there.

Ries declined to speculate when the law, which he described as a "a major political challenge, not a technocratic question", might finally be passed.

"The process of moving from a state-controlled sector to a sector that is a mixed one, allowing for participation for foreign investors in some form or fashion, has been slower and more halting than we would have liked," he said.

Yet Ries painted a brighter picture overall of the Iraqi economy's lumbering steps toward stability.

He said core inflation, which is still a relatively high around 12 to 15 percent, had been reduced substantially, and that the economy was on track for "solid growth" in 2008.

But he said the government must improve its ability to spend budgeted money on capital projects and other necessities and needs to do more to diversify the economy and reduce corruption. (Editing by Peter Graff and Mary Gabriel)