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FILE PHOTO: Saudi Arabia's King Salman attends a Memorandum of Understanding signing ceremony in Putrajaya, Malaysia February 27, 2017. REUTERS/Edgar Su/File Photo

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BAGHDAD (Reuters) - The king of Saudi Arabia and the Iraqi prime minister will meet on Wednesday, a Saudi newspaper reported, their second meeting this year as the neighbours try to heal a rift over Iraq's alliance with Saudi arch foe Iran.

A reconciliation between the Sunni Muslim kingdom and majority Shi'ite Iraq would be a boost to the Gulf Arab region, where tensions are sky high, both within and with Iran.

Last week Saudi Arabia, the United Arab Emirates and other Arab countries severed ties with Qatar. Doha denies their accusations of it backing Islamist militants and Iran.

Days later attacks in Tehran killed 17 people, claimed by hardline Sunni militants Islamic State. Iran has accused Saudi Arabia of funding Islamist militants, including IS.

Iraqi PM Haider al-Abadi and King Salman will meet on Wednesday at the Saudi Red Sea port of Jeddah, the London-based newspaper Asharq al-Awsat reported, citing Saudi State Minister for Gulf Affairs Thamer al-Sabhan.

The Iraqi government spokesman did not respond to phone calls seeking comment. Abadi has been eager to keep Iraq out of the dispute between Qatar and its neighbours.

On Sunday, he denied press reports which had angered Gulf Arab states suggesting that hundreds of millions of dollars sent by Qatar to Baghdad for the freeing in April of a group of abducted Qatari royals had ended up in Iran.

The royals were abducted in 2015 in southern Iraq, a region controlled by Iranian-backed groups.

Iraq lies on the fault line between Shi'ite Iran and the mostly-Sunni Arab world. Deep-running animosity and distrust between the two sides is fuelled by sectarian divides.

Tensions grew further after Iran, by leveraging its ties with Iraq's Shi'ites, has emerged as the main power broker in Iraq after the United States withdrew its troops in 2011.

Tehran also been a key support in Iraq's efforts to defeat Islamic State, providing military assistance to Shi'ite paramilitary fighting the Sunni insurgents who declared a ''caliphate'' over parts of Iraq and Syria in 2014.

King Salman and Abadi last met in March on the sidelines of the Arab summit and in February Saudi Foreign Minister Adel Al-Jubeir made a rare visit to Baghdad in February.

Improved ties may also help heal deep and bitter divisions between Iraq's Shi'ite majority and Sunni population.

(Reporting by Maher Chmaytelli; Editing by Raissa Kasolowsky)

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