Turkish Prime Minister Recep Tayyip Erdogan has threatened an incursion into Iraq unless Baghdad clamps down on the Kurdistan Workers' Party (PKK) rebels on its territory and turns over its leaders.

Defence Minister Abdel Qader al-Obeidi, Foreign Minister Hoshyar Zebari and the National Security Minister Shirwin al-Waili were updating lawmakers on government moves to prevent the incursion and crack down on the rebels.

The closed-door meeting was called after 12 Turkish soldiers and 32 rebels were killed in heavy clashes over the border in Turkey on Saturday night, further raising tensions between Baghdad and Ankara.

Turkey says the fighting erupted in a mountainous region in the southeastern province of Hakkari after PKK rebels infiltrated from northern Iraq and attacked a patrol.

Despite pressure from Washington and much of the international community to hold off, Erdogan has said his government is ready to use parliamentary authorisation -- obtained on Wednesday -- to send troops into Iraq.

Iraqi President Jalal Talabani rejected on Sunday the idea that Kurdish rebel leaders holed up in the rugged border region could be rounded up and handed over as Erdogan has demanded.

And he reiterated a call for the rebels to lay down their arms or leave the country.

"We have appealed to the PKK and PJAK (an offshoot of the PKK) to stop fighting and to transform themselves from military organisations into civilian and political ones," Talabani said.

"But if they insist on continuing the fight, they should leave Kurdistan and not create problems here. They should go back to their countries and do whatever they want."

Ankara says some 3,500 PKK fighters are based in northern Iraq where they are able to obtain weapons and are supported by Iraqi Kurdish leaders, a charge the Iraqi Kurdish administration strongly denies.

Faced with rising rebel violence, Turkey says it is running out of options other than military action, with neither the United States nor Iraq doing enough to stamp out the rebel bases.

More than 37,000 people have been killed since 1984 when the PKK took up arms fighting for self-rule in Turkey's mainly Kurdish southeast.