(Adds mosque raided, details)

By Paul Tait and Missy Ryan

BAGHDAD, Nov 14 (Reuters) - Sectarian strife remains a great threat despite improving security, Iraqi leaders warned on Wednesday, only hours after a big blast rocked central Baghdad and the U.S. military said three soldiers had been killed.

A roadside bomb killed two civilians and wounded three just outside the heavily fortified Green Zone that houses the U.S. embassy and government ministries, police said.

The explosion, which shook buildings in the Green Zone, was close to a checkpoint where hundreds of Iraqis who work inside the sprawling complex queue every morning.

It was one of the loudest blasts heard in the capital in weeks after a lull in attacks that had become almost a daily occurrence earlier this year.

U.S. military spokesman Rear Admiral Gregory Smith said the blast, targeting a convoy of military vehicles, caused "multiple military and civilian casualties" but gave no further details.

South of Baghdad, police sources said a bomber wearing a vest packed with explosives killed two people and wounded six at a meeting of local Sunni Arab tribal sheikhs in Iskandariya, a volatile town in an area known as the "triangle of death".

Iraqi leaders gathered at a reconstruction conference in the Green Zone, not far from the Baghdad blast site, and warned that money alone would not solve Iraq's problems.

Vice President Tareq al-Hashemi, a Sunni Arab, said Iraq had not just suffered material destruction in a sectarian conflict that had tipped the nation to the brink of sectarian civil war.

"The greatest destruction was the social fabric," Hashemi told the conference. "This will remain the principal obstacle to security and stability."

Intra-sectarian trouble remains a big hurdle as well as conflict between majority Shi'ites and minority Sunni Arabs.

On Wednesday, security guards from the Sunni Endowment, a state body that runs Sunni Muslim religious sites, surrounded a mosque used by the Muslim Scholars Association, an influential body of hardline Sunni clerics accused by the Iraqi government of fomenting violence.

A statement by the Muslim Scholars Association said its staff had been evicted from the Um al-Qura mosque in western Baghdad and a radio broadcast from the mosque had been stopped.

There was no immediate reason given for the raid but the two groups have long been rivals.

DEADLY YEAR

A bomb blast killed two U.S. soldiers and wounded four in Diyala province northeast of Baghdad on Tuesday, the military said. Another soldier was shot and killed near northern Mosul.

Their deaths took the total of U.S. soldiers killed in Iraq to 3,863, according to the independent Web site icasualties.org.

"We need to remind ourselves that this fight is not over," U.S. Ambassador Ryan Crocker told the reconstruction conference.

"There is still a determined enemy, terrorists, extremist militias that will take any opportunity they can find to get control back of the streets of Baghdad," he said.

An extra 30,000 U.S. troops, improving Iraqi security forces and the growing use of neighbourhood police units have been credited for sharp drops in U.S. military and Iraqi civilian casualties in the previous two months.

However, 860 U.S. troops have been killed so far this year, the worst annual total since the U.S.-led invasion to topple Saddam Hussein, 11 higher than the previous worst yearly total in 2004.

U.S. President George W. Bush sent the extra troops in a last-ditch bid to stop prevent sectarian civil war in Iraq.

The offensive began in mid-February, when Iraq was gripped by multiple bombings and shooting attacks almost every day.

Attacks in Baghdad and elsewhere have gradually declined since the "surge" troops became fully operational in mid-June.

However, ethnically mixed Mosul, Iraq's third-largest city, and Diyala province remain troublespots after al Qaeda in Iraq, blamed for most big car bomb attacks, were squeezed out of western Anbar province and Baghdad. (Additional reporting by Dean Yates and Aseel Kami in Baghdad; Editing by Alison Williams)

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