Clashes between Iraqi forces and Kurdish Peshmerga fighters broke out Friday as Iraqi units moved north of Kirkuk to the town of Altun Kupri.
Fighting began when Iraqi troops and Shia militias entered Altun Kupri in an operation "to impose law and order," according to the Iraqi military.
An eyewitness said Peshmerga forces were using light and heavy machine guns and mortars.
"This is the beginning of the war between the Kurds and Baghdad," Goran Iz Al-Din, a Peshmerga commander, said.
"We don't want to be ruled by Iran," he added, a reference to the fact that some of Iraq's Shia militias -- known as Popular Mobilization Units -- are backed by Tehran.
Clashes were still ongoing in the northern part of the town. Altun Kupri -- a multi-ethnic town made up of Kurds, Turkmen and Arabs -- is located about 20 miles north of Kirkuk.
Iraqi forces seized the coveted oil-rich city of Kirkuk on Monday after three years under Kurdish control.
The Kurds had gained control of the city after Iraqi government forces abandoned it during ISIS' offensive in 2014.
The Kurdistan region and the greater Kirkuk province have an estimated 15% to 25% of Iraq's oil reserves, with several key oil fields surrounding the city of Kirkuk. Iraq has one of the world's largest known oil reserves.
Kirkuk was historically a Kurdish-majority town, but during the rule of Saddam Hussein, the ousted dictator moved Arab families in and Kurdish families out to change the area's ethnography, under a policy termed "Arabization." It's also home to Sunni Arabs and Turkmen.
Extremists, including al Qaeda in Iraq, have launched major attacks on Kirkuk over the past decade, targeting mostly security forces there.
After the fall of Hussein, Kurds began returning to Kirkuk, repopulating the city and its surrounding areas.