BAGHDAD/WASHINGTON - The situation in Iraq continues to deteriorate since bloody clashes between insurgent groups and government forces broke out earlier this month.

Large swathes of Iraq's northern territories are now in the hands of militant groups, fuelling fears the country may split and a full-blown sectarian war erupt in the Middle East.

The insurgent groups, spearheaded by militants from the Islamic State of Iraq and the Levant (ISIL), come from the country's Sunni Arab minority. They believe the current Shiite-dominated government has treated Sunnis unfairly.

Shiite Prime Minister Nouri al-Maliki, meanwhile, denounced the insurgents as "terrorists" and has vowed to overcome them.

However, the government's troops have been dramatically defeated during the past week, with large parts of the country's north falling into the hands of the rebels.

On Monday, the insurgents seized the strategic city of Tal Afar near the Syrian border, and an Iraqi army helicopter was shot down during clashes.

The militants had previously seized Mosul, the second largest city in Iraq.

"Tal Afar has fallen into the hands of the militants of the ISIL, after they heavily pounded the city with mortar rounds and rockets since last night," said Mohammed Abdul Qader, head of the city council.

"The defenders of the city have withdrawn after running out of ammunition," he said, adding many of the officers disappeared after the battle.

Qader told Xinhua dozens of families had left their homes as a result of the street battles and mortar shelling. Most of the displaced families have fled to the city of Sinjar, some 60 km west of Tal Afar.