Kurdish leaders accuse Iraqi Prime Minister Nouri al-Maliki of being hysterical and unbalanced, while he says the Kurdish capital, Erbil, is a centre for the Islamic State (Isis) and adherents of Saddam Hussein.
Kurdish ministers are boycotting cabinet meetings in Baghdad while cargo flights from Baghdad to Erbil and Sulaimaniyah, also in Kurdistan, have been suspended. Road links have already been cut by insurgents.
"Relations between Erbil and Baghdad are more poisonous than they have ever been," said a senior politician in the Iraqi capital yesterday.
The development means the Shia-dominated Baghdad Government and the Kurds cannot coordinate action against Isis though it threatens both.
The angry exchange started on Wednesday when Maliki caused surprise by accusing the quasi-independent Kurdistan Regional Government (KRG) of collaborating with Isis and other groups that drove the Iraqi army out of much of northern and western Iraq in June.
He said in his weekly television address that "we will never be silent about Erbil becoming a base for the operations of the Islamic State and Baathists and al-Qaeda and the terrorists".
Maliki was voicing a suspicion held by many Shia in Baghdad that, because the KRG benefited from the Isis offensive by taking over Kirkuk and other disputed territories, it was complicit in the Sunni Arab revolt.
The Kurds insist they only took advantage of the disintegration of the Iraqi army to occupy areas that were theirs by historic right.
The office of KRG President Masoud Barzani says Maliki "has become hysterical and has lost his balance".
It demands that he step down as Prime Minister and accuses him of destroying the country.
Maliki's political strategy may be to develop a stab-in-the-back explanation for his defeats that will convince the Shia community he is not responsible for their loss of power. He has attributed the fall of Mosul on June 10 to "conspirators", but has not named them.
Sunni tribal leaders who have sided with Isis are living in Erbil, but they have nowhere else to go and that does not necessarily meant there is a Sunni-Kurd conspiracy against Baghdad.
"The Shia as a whole are very frightened now," said one Iraqi observer.
Only a small government force is still holding out at Baiji refinery according to reports from the area and an army attack into Tikrit on July 1 was repulsed.
Iraq is desperately trying to rally international support, but the United States and Iran are wary of becoming over-involved in a sectarian war.
In a letter to the UN, Iraq said Isis had gained control of nuclear materials at Mosul University that might be used by terrorists.
But the International Atomic Energy Agency (IAEA) in Vienna said yesterday that the materials did not pose a security risk.
"On the basis of the initial information we believe the material involved is low grade and would not present a significant safety, security or nuclear proliferation risk," said IAEA spokeswoman Gill Tudor.
- Independent