(Adds meeting proposal, paragraphs 7,8)

By Thomas Grove

SIRNAK, Turkey, Oct 22 (Reuters) - Turkey said on Monday it would 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 preparation for an incursion against rebel bases, although Prime Minister Tayyip Erdogan has pressed Iraq to curb the Kurdish separatists first.

"If expected developments do not take place in the next few days, we will have to take care of our own situation," Erdogan said Monday.

U.S. President George W. Bush expressed his "deep concern" about Kurdish rebel attacks and told Turkish President Abdullah Gul the United States would continue to urge Iraq's government to act against the Kurdistan Workers Party (PKK) rebels, the White House said.

Bush also spoke with Iraqi Prime Minister Nuri al-Maliki and the two agreed to work with Turkey to prevent the rebels from carrying out attacks from Iraqi soil.

"We want the Iraqi government to take swift action to stop the activity of the PKK," White House spokesman Tony Fratto said. "We do not want to see wider military action on the northern border."

Secretary of State Condoleezza Rice and Britain's visiting foreign secretary, David Miliband, said they had proposed a meeting in Istanbul next month of officials from the United States, Turkey and Iraq to discuss how to stop the attacks.

The two top diplomats said in a statement the proposed meeting would look at how to implement a Sept. 28 anti-terrorism deal signed by Iraq and Turkey.

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

In a statement received by Reuters in Baghdad, the PKK said it was ready to "extend the hand of peace again and we are ready for dialogue with others to solve the issue," if Ankara stopped its military operations against Kurdish fighters.

"But if Turkey continues with its hostile position against (the) Kurdish people, we will defend ourselves and our people."

Turkey has fought for decades against the PKK, which wants an independent homeland in southeast Turkey and northern Iraq.

Erdogan is under public and military pressure to strike in Iraq against the group, which has killed some 40 Turkish soldiers in the past month.

DIPLOMATIC MEANS

But he has been resisting a cross-border operation and his foreign minister, Ali Babacan, said: "We will try all diplomatic means before carrying out any military operation."

On a visit to Britain, Erdogan said Turkey had agreed with the Iraqi government that it was important for Iraq to take concrete steps to end rebel activities in the north.

"The fact this is not taking place renders the possibility of Turkey using her right of self-defense inevitable," he said in Oxford, speaking through an interpreter.

After speaking to Rice on Sunday, Erdogan had agreed to hold off for a few days.

Babacan planned to travel to Baghdad Tuesday for talks with Iraqi Prime Minister Nuri al-Maliki and other senior officials, diplomats said, adding the schedule could change.

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

The Turkish lira currency and Istanbul's share index fell 3 percent Monday on concerns about a major 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.

A Reuters reporter said he heard heavy artillery fire in the mountains of Sirnak province. Army trucks transporting artillery and other weaponry were heading toward 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 destabilise Iraq's Kurdish region and hurt the regional authority there if it looked as if it were siding with Turkey against Kurds.

Baghdad has little control over the largely autonomous northern region led by Iraqi Kurdish leader Masoud Barzani. (Additional reporting by Gareth Jones, Evren Mesci in Ankara, Paul de Bendern, Emma Ross-Thomas in Istanbul, Tabassum Zakaria in Washington, Mariam Karouny in Baghdad and Adrian Croft in Oxford)

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