(Adds Rice meets Maliki in Egypt)

By Ahmed Rasheed

BAGHDAD, May 2 (Reuters) - The Iraqi government has sent a draft oil law to parliament, a major step towards meeting one of the political benchmarks Washington has set for Baghdad.

The announcement by Oil Minister Hussain al-Shahristani on Wednesday came on the eve of a major conference in Egypt where industrialised powers and Iraq's neighbours will discuss how to stabilise Iraq and seek reforms in return for reconstruction.

The draft is crucial to regulating how wealth from Iraq's oil reserves would be shared by its sectarian and ethnic groups.

It was passed by cabinet in February and hailed at the time by Shi'ite Prime Minister Nuri al-Maliki as a pillar of Iraqi unity. But a dispute between the central government and autonomous, oil-rich Kurdistan over control of the world's third largest oil reserves has delayed its submission.

U.S. President George W. Bush, who on Tuesday vetoed Democrat-backed legislation that would have set dates for the withdrawal of U.S. troops in Iraq, is pressing Maliki to approve power-sharing agreements to help ease violence.

A day after Bush called such a timetable "rigid and artificial," the U.S. military announced on Wednesday the arrival of nearly 4,000 extra soldiers in Iraq as part of the White House's troop "surge", seen as a last-ditch effort to avert a civil war between majority Shi'ites and minority Sunni Arabs who were dominant under Saddam Hussein.

Speaking to reporters in Saudi Arabia, Shahristani said he hoped the oil bill would pass by the end of May.

"It has been sent to parliament now. There has been agreement among the political parties to work together to enact it by the end of the month," Shahristani said.

"The KRG (Kurdish Regional Government) is not opposed to the draft law ... they are very happy with the draft law."

There was no immediate comment from Kurdish officials, who have said annexes in the draft are unconstitutional because they wrest oilfields from regions and place them under a state firm.

Haider al-Ibadi, a lawmaker and head of the economic and investment commission in parliament, told Reuters parliament had not received the draft yet. He expected cabinet would meet tomorrow to send the draft to parliament.

Besides the oil law, Washington's benchmarks include rolling back a ban on former members of Saddam Hussein's party holding office, reforming the constitution and calling provincial polls

The United States hopes such benchmarks will promote reconciliation and draw minority Sunni Arabs away from the insurgency and back into the political process.

With most oil reserves in Iraq in the Kurdish north and Shi'ite south, an equitable distribution of oil revenues is key to easing violence that has killed tens of thousands of Iraqis and more than 3,300 U.S. troops since the 2003 invasion.

POWERS MEET IN EGYPT

The benchmarks will be high on the agenda in Egypt's Sharm el-Sheikh Red Sea resort, where 60 countries are expected to endorse the International Compact for Iraq, a five-year plan that grants foreign support in exchange for reforms.

The highlight of the May 3-4 talks aimed at containing violence in Iraq and preventing a regional spill would be a meeting on the sidelines between U.S. Secretary of State Condoleezza Rice and Iranian Foreign Minister Manouchehr Mottaki.

Washington accuses Shi'ite, non-Arab Iran of stirring violence in Iraq, a charge Tehran denies.

On her arrival in Egypt on Wednesday, Rice's first meeting was with Maliki, to be followed by talks with U.N. Secretary-General Ban Ki-moon and China's Foreign Minister Yang Jiechi.

Rice told reporters travelling with her: "Iraq is at the centre of either a stable Middle East or an unstable Middle East," but played down expectations about the talks.

"Let's not have overreaching expectations. It will take some time to overcome suspicions in the region," Rice said. (Additional reporting by Mussab Al-Khairalla and Ibon Villelabeitia in Baghdad, Mariam Karouny in Sharm el-Sheikh, Sue Pleming in Washington and Jonathan Wright in Cairo)

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