MANAMA, June 8 (Reuters) - Bahrain said on Sunday it was setting up a new embassy in Baghdad and selecting an ambassador to Iraq, the latest sign of warming ties between Iraq and its Gulf Arab neighbours.

"We are currently choosing an ambassador. We have finished deciding where the embassy should be. We have an agreement with the Iraqi government," Foreign Minister Sheikh Khaled bin Ahmed al-Khalifa told a news conference.

"It just remains to choose the ambassador and as a result of the security situation it is ... not easy. For the person chosen or those who choose him."

United Arab Emirates Foreign Minister Sheikh Abdullah bin Zayed al-Nahayan visited Iraq on Thursday, the first Gulf Arab foreign minister to do so since the U.S.-led invasion in 2003.

Saudi Arabia and Bahrain have both promised to open up embassies in Baghdad and say delays are the result of logistics and safety concerns rather political considerations. The UAE also said it would appoint an ambassador to Baghdad.

No Arab country has had a permanent ambassador in the Iraqi capital since Egypt's envoy was kidnapped and killed shortly after arriving in 2005.

The United States has been pressing Sunni Arab governments to shore up the government of Nuri al-Maliki by forgiving debts and establishing high-level diplomatic representation.

Improved ties with Gulf Arab states could increase Iraq's chances of persuading two of its biggest creditors, Saudi Arabia and Kuwait, to cancel Baghdad's debts.

Oil powerhouse Saudi Arabia, the region's most influential country, wants the Shi'ite-led Iraqi government to reach out politically to Sunnis, which ruled Iraq under Saddam Hussein but have complained of being marginalised since his overthrow.

Political analysts say Baghdad's reliance on U.S. and other foreign troops and close ties with non-Arab, Shi'ite-majority Iran may also lie behind the reluctance of Sunni Arab states to normalise ties. Iraq is the only Shi'ite-led Arab country. (Reporting by Mohammed Abbas; writing by Lin Noueihed; editing by Andrew Dobbie)

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