Butcher Sherzad Saleh stands outside his shop in Tuz Khurmatu holding a dead chicken. He has more pressing concerns than a high-level dispute over territory.

"The army comes here, this is my job; the peshmerga come here, this is my job," says Saleh.

He means forces from the federal government and from the autonomous Kurdistan region deployed in disputed areas of north Iraq, including near Tuz Khurmatu, during recent periods of high tension between the two sides.

"I am not with the army or the peshmerga," he says. "We want services, electricity, projects."

But top federal and Kurdish politicians have other priorities.

Whatever people like Saleh may wish for, Tuz Khurmatu, a town of low-rise buildings, palm trees and around 110,000 residents, is in a swathe of territory Kurdistan wants to incorporate into its autonomous region over Baghdad's strong objections.

Diplomats and officials believe this dispute over territory is the greatest threat to Iraq's long-term stability.

The establishment in September of the federal Tigris Operations Command, which covers disputed northern territory, drew an angry response from Kurdish leaders and increased tensions with the federal government.

Then on November 16, a firefight broke out during an attempt by Iraqi forces to arrest a Kurdish man in the town.

One person was killed and others were wounded, further worsening relations between Baghdad and Kurdistan as both sides deployed reinforcements.

The crisis, which Iraq's parliament speaker warned could lead to civil war, has since eased, but the dispute over territory remains unresolved.

For the people of Tuz Khurmatu, simmering tensions between Baghdad and Kurdistan cause fear and are also bad for business.

The "army came, and the peshmerga came; the people are afraid" and business suffered, Saleh says.

"We do not want a war to happen. There is killing in war, it would affect our circumstances... our work would stop," says grocer Hisham Fateh Hamid.

-- Mixed identities --

Tuz Khurmatu is a town of mixed identities, a fact emphasised by its flags -- massive Kurdish flags are emblazoned on hills to its east, Iraqi federal flags fly over official buildings and police checkpoints, and countless banners marking the death of a revered Shiite imam flutter from houses.

Many residents are Turkmen Shiites, hence the banners venerating Imam Ali, but Tuz Khurmatu also has Kurdish and Arab populations.

Despite their mixed ethnicities, the people say the dispute between the Kurdish region and the Arab-dominated government in Baghdad has not caused problems between residents.

"There's no difference between Turkmen or Arabs or Kurds," says Saleh, a Kurd.

Shakir Ahmed, an Arab owner of a grocery shop, agrees, saying that "no tension has occurred between citizens."

But Tuz Khurmatu is caught in the middle anyway: Kurdish peshmerga forces are deployed on the hills east of the town, and Iraqi soldiers man checkpoints and reinforced positions to the south.

Then there is a multiplicity of security forces inside Tuz Khurmatu -- local police, Iraqi federal police, Iraqi soldiers and Kurdish forces.

Territorial tensions are not the only issue in Tuz Khurmatu. There are also seemingly sectarian attacks, part of a broader problem across Iraq, in which Shiites are frequently targeted in bombings by Sunni militants.

On December 17, two car bombs exploded in a Turkmen area of the town, killing five people and wounding 26.

Hamdi Ibrahim Samin's wife was wounded in the head by one of the blasts which also smashed his house.

An entire wall that used to hold a door has also been blown away, and a few meagre belongings including a fan and two worn benches are piled amid the rubble.

"Nothing remains," Samin says, as water from a broken pipe flows down a narrow street past other wrecked buildings near his home.

What Tuz Khurmatu ultimately needs, according to Shalal Baban, the administrative official responsible for the district, is development, not more military men and materiel.

"We currently need projects, construction," he says, noting the lack of even basic services such as clean drinking water.

"We don't need tanks, troop transports, armoured vehicles or planes," Baban says. "We need projects."