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Iraq's Foreign Minister Ibrahim al-Jaafari (R) receives U.S. Secretary of State John Kerry in the library at the foreign minister's villa in Baghdad April 8, 2016. REUTERS/Jonathan Ernst

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By Arshad Mohammed

BAGHDAD (Reuters) - U.S. Secretary of State John Kerry visited Iraq on Friday to show support for its prime minister, who is grappling with a political crisis, a collapsing economy and a fight to retake ground from Islamic State militants.

Prime Minister Haider al-Abadi last week unsettled Iraq's political elite with a proposed cabinet reshuffle that aims to curb entrenched corruption by replacing long-time politicians with technocrats and academics.

His aim is to free Iraqi ministries from the grip of a political class that has used the system of ethnic and sectarian quotas instituted after the U.S.-led invasion in 2003 to amass wealth and influence.

U.S. officials fear the political unrest may harm Iraq's efforts to retake territory it has lost to Islamic State militants, notably its second city of Mosul, seized when parts of the Iraqi army collapsed in 2014.

"This is obviously a very critical time here in Iraq," Kerry said as he began a meeting with Foreign Minister Ibrahim al-Jaafari at his villa in Baghdad's heavily protected Green Zone, which houses embassies and government buildings.

Jaafari said in a statement that Washington was providing a $155 million package of humanitarian aid to families displaced from areas controlled by Islamic State.

More than three million Iraqis have been forced to leave their homes, according to U.N. statistics, putting pressure on the government's already strained finances.

MOSUL OFFENSIVE ON HOLD

Kerry later met with Abadi, who ignored a U.S. reporter's shouted question about whether he wanted Washington to deploy more troops to Iraq. The United States, which withdrew its forces from Iraq in 2011, has redeployed several thousand as part of a coalition it is leading against Islamic State.

Announcing Kerry's visit, U.S. State Department spokesman John Kirby said the trip "will underscore our strong support for the Iraqi government as it addresses significant security, economic and political challenges."

In the past two weeks, Iraqi forces backed by U.S.-led coalition air strikes have retaken significant parts of Hit, a town 130 km (80 miles) northwest of Baghdad.

However, an offensive billed as the first phase of a campaign to recapture the northern city of Mosul has been put on hold until reinforcements arrive, the commander of the operation said on Wednesday.

Kerry plans to "encourage the Iraqis, while they're dealing with the cabinet reshuffle, not to lose sight of the need to stay focused on the fight against" Islamic State, a senior U.S. official in Washington told reporters earlier this week.

There was a need "to plan steadily and carefully" to retake Mosul, the official said, before Kerry flew to Iraq aboard a U.S. military aircraft.

Baghdad is also hamstrung by the plunge in global oil prices that has shrivelled its main source of revenue.

On Thursday, officials from the International Monetary Fund and the government said the oil price forecast in the 2016 budget would be cut to about $32 a barrel from $45, widening Iraq's fiscal deficit by several billion dollars.

Kerry also plans talks with the head of the Kurdistan Regional Government, Nechirvan Barzani, the State Department said.

(Additional reporting by Maher Chmaytelli and Stephen Kalin; Editing by Janet Lawrence and John Stonestreet)

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