Saleh, a Kurd who quit Iraq's central government to lead the main Kurdish bloc's campaign in elections won by regional President Massud Barzani in July, is considered one of the war-torn country's most able politicians.

"Today I appoint you to officially form the government and I call on you to consult with all the political parties of Kurdistan," Barzani said at a ceremony in the regional capital Arbil.

Saleh responded by confirming that his administration would halve the number of ministers in the new cabinet.

"The next Kurdish government will have 19 ministers in addition to the prime minister and his deputy," Saleh told reporters. There were 42 ministers in the previous administration.

Prior to his resignation as one of Iraq's two deputy prime ministers, Saleh was seen by Western diplomats as one of the most progressive and professional members of the Baghdad government. Saleh had also taken a leading role in attracting much-needed foreign investment to the war-ravaged country.

He campaigned in July's elections for an alliance comprised of the two dominant Kurdish factions -- the Kurdistan Democratic Party (KDP) of Barzani and the Patriotic Union of Kurdistan (PUK) of Iraqi President Jalal Talabani.

Saleh takes office at a time of heightened Kurd-Arab tensions and major oil and land disputes with the central government.

Kurdish demands to expand their region to include the Kirkuk oil fields and other districts have triggered increasingly heated exchanges with Prime Minister Nuri al-Maliki's Shiite-led government in Baghdad.

But Saleh moved to quell such differences on Wednesday.

"We have to avoid political quarrels with Baghdad because Iraq is going through difficult times," he said.

"It is in the interest of everyone to tackle these questions in a calm manner."

Ethnic tension between Kurds and Arabs remains high in northern Iraq, particularly Kirkuk, with almost daily violence.

General Ray Odierno, who leads the US military mission in Iraq, on Wednesday repeated warnings that Arab-Kurd tensions now pose the most serious threat to Iraq's stability.

He also told a congressional hearing in Washington that nationwide parliamentary elections due in January are crucial to Iraq's future and US plans to withdraw forces.

The Kurdish region's international reputation suffered a blow last week when the authorities suspended the activities of Norwegian oil company DNO following an allegation that Kurdish minister for natural resources Ashti Hawrami was involved in a controversial transfer of shares in the company.

The value of DNO shares fell by nearly half following the suspension but recovered some of the lost ground after Kurdish foreign affairs minister Falah Bakir was quoted as saying the suspension would not be permanent.

Hawrami denied benefitting from the transaction.