Turkey said on Monday it will exhaust diplomatic channels before launching any military strike into northern Iraq to root out Kurdish rebels, who killed at least a dozen Turkish soldiers in fighting over the weekend.

Turkey has built up its forces along the border with Iraq in anticipation of an incursion against rebel bases but Prime Minister Tayyip Erdogan has said he will hold off for a few days to let the United States try to curb the Kurdish separatists.

Washington, in turn, urged the Iraqi government on Monday to act swiftly to stop Kurdish rebels from mounting further attacks in Turkey.

"We do not want to see wider military action on the northern border," White House spokesman Tony Fratto said.

Washington and Iraq have been calling on Turkey to refrain from a military push into the largely autonomous Kurdish region, one of the few relatively stable areas since a U.S.-led invasion in 2003.

The office of Iraqi President Jalal Talabani, a Kurd, told Reuters the rebels would announce a ceasefire on Monday evening.

Erdogan is under pressure from his military and the public to strike in Iraq against the outlawed Kurdistan Workers Party (PKK) rebels, who have killed some 40 soldiers in the past month.

After speaking with U.S. Secretary of State Condoleezza Rice on Sunday, Erdogan agreed to hold off for a few days and he left for an official visit to Britain on Monday.

Erdogan has been resisting a cross-border operation and his foreign minister, Ali Babacan, was quoted on Monday as saying: "We will try all diplomatic means before carrying out any military operation."

But the decades-long fight against the PKK, which wants an independent homeland in southeast Turkey and northern Iraq, is highly emotive and Ankara confirmed eight of its soldiers were missing after the recent fighting.

The pro-PKK Firat news agency said eight soldiers had been captured and gave the names of seven men. Turkey has denied any of its soldiers were captured in the fighting.

MARKETS JITTERY

The Turkish lira currency fell three percent to 1.2360 against the dollar and the Istanbul stock exchange fell five percent on Monday on the concerns of a cross-border offensive.

Turkey's tougher stance has helped propel global oil prices to record highs over the past week. The PKK has said it might target pipelines carrying Iraqi and Caspian crude across Turkey.

The General Staff said 12 soldiers died in Sunday's fighting and 34 rebels had been killed in an army offensive backed up by attack helicopters and artillery over the past two days.

Turkey has deployed as many as 100,000 troops, backed by tanks, F-16 fighter jets and helicopter gunships along its border with Iraq in anticipation of a possible incursion.

A Reuters reporter said he saw army trucks transporting artillery guns and other weaponry towards the border.

Turkey estimates 3,000 PKK rebels are based in Iraq. Ankara believes U.S. occupying forces in Iraq could, if they wanted, capture PKK leaders hiding in the Qandil mountains, shut down their camps and cut off supply routes and logistics support.

But Washington is hesitant as such moves could destabilize Iraq's Kurdish region and hurt the regional authority there if it looked as if it were siding with Turkey against fellow Kurds.

Turkish media said more than 200 rebels were involved in the ambush on Sunday morning in mountainous Hakkari province.

In Ankara, some 8,000 students joined an anti-PKK rally on Monday, one of many staged in the past 24 hours in this Muslim country of 75 million. Opposition leader Deniz Baykal repeated his demand for an urgent cross-border operation.

(Additional reporting by Gareth Jones, Evren Mesci in Ankara, Emma Ross-Thomas in Istanbul and Tabassum Zakaria in Washington)

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