Speaking in the capital of northern Iraq's autonomous Kurdish region Talabani also reiterated a call for the rebels from to lay down their arms or leave the country.

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 their leaders.

The threat of an incursion increased on Sunday after 12 Turkish soldiers and 32 rebels were killed in overnight clashes in southeastern Turkey sparked by a PKK ambush near the tense border with Iraq.

"The handing over of PKK leaders to Turkey is a dream that will never be realised," Talabani, himself a Kurd, told journalists.

"PKK's leaders are in Kurdistan's rugged mountains. The Turkish military with its mightiness could not annihilate them or arrest them, so how could we arrest them and hand them to Turkey?"

However, Talabani and Iraqi Kurdish president Massud Barzani hold most sway over Iraqi Kurdish peshmerga fighters best suited for any operations Iraq could launch.

"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."

A statement from Prime Minister Nuri al-Maliki's office condemned what it described as a "terrorist action" carried out by the PKK against Turkish soldiers, after a meeting of Iraq's security committee.

Turkey's parliament on Wednesday approved a motion authorising military strikes into Iraq for a one-year period against PKK rebels using northern Iraq as a springboard for cross-border attacks.

Iraqi lawmakers overwhelmingly condemned the Turkish move on Sunday but urged their own government to do more to rid the country of the rebels.

"The parliament calls on PKK fighters to leave Iraqi territories and asks the Iraqi government to take the required measures to stop PKK activities being launched from Iraqi territories," a motion said.

In Ankara, Erdogan said he, President Abdullah Gul and top ministers and military leaders would meet later Sunday to decide on what action to take following the latest clashes.

The Turkish army has already sent additional troops to the region following the attack in which PKK rebels allegedly ambushed an infantry platoon.

Erdogan on Friday urged the Iraqi government to close "once and for all" the PKK camps, but judged "positive" recent vows by Baghdad to do so.

"What would satisfy us is the closure of all the PKK camps, including their training camps and the handover of their terrorist leaders," he was quoted as saying by the Anatolia news agency.

Ankara claims that some 3,500 PKK fighters have found refuge in Iraqi Kurdistan and are tolerated or even actively supported by Iraqi Kurdish leaders -- a charge they strongly deny.

"We call on both sides to avoid the war, but if war broke out between them, we would not be with either of them," Barzani said at the press conference with Talabani.

The PKK has waged a bloody campaign for Kurdish self-rule in southeast Turkey since 1984. The conflict has claimed more than 37,000 lives.

A leading PKK figure told AFP that Turkish soldiers had been captured after the fighting, but Turkish Defence Minister Vecdi Gonul told journalists in the Ukrainian capital Kiev that no hostages were taken.

Gonul also said Turkey has plans for a cross-border incursion but "not urgently."