"It has been decided to recommend to the government that they take economic measures against the Kurds who support, directly or indirectly, the separatist organisation," said a statement issued after a six-hour meeting of the council.

Turkish President Abdullah Gul chaired the meeting of top officers and ministers to discuss options for tackling the banned Kurdistan Workers' Party (PKK).

The party has been fighting for self-rule in southeast Turkey since 1984 and its fighters take refuge in camps in northern Iraq.

Normally, the government follows the council's recommendations.

Senior politicians have already raised the issue of sanctions in recent days.

Foreign Trade Minister Kursat Tuzmen said Wednesday that Turkey was Iraq's largest trading partner.

"We are keeping all our options open," he added.

And on Tuesday, Prime Minister Recep Tayyip Erdogan hinted at export restrictions on vital items such as power, water and food.

Turkey supplies Iraqi Kurdistan with electricity and cross-border trade between the two countries is worth several hundred million dollars a year.

The council's decision came as Turkish warplanes bombed PKK targets in the south of the country along the Iraqi border in response to a PKK ambush Sunday in which 12 Turkish soldiers were killed.

The military says it has killed 34 PKK militants in operations since Sunday's attack.

Inside Turkey, pressure is building on the government to launch a military incursion into northern Iraq against PKK bases.