Obama, speaking at the G20 summit in South Korea, said there were still challenges to come in Iraqi politics. But he billed the deal as "inclusive" and said it reflected the will of the people following the Iraqi election in March.

"There are still some challenges to come but all indications are the government will be representative, inclusive and reflect the will of the Iraqi people," Obama said, capping an intense US effort to back the unity process.

"This agreement marks another milestone in the history of modern Iraq," Obama said, and pledged the United States would continue to support Iraqis as they solidified their democracy.

In a statement, Secretary of State Hillary Clinton also welcomed the news, even after members of a key Sunni bloc staged a walkout at the parliament, underscoring the deal's fragility.

The agreement was "a testament to the determination of the Iraqi people to build their own democracy, a goal only they can achieve," Clinton said.

The agreement announced in Baghdad would return Prime Minister Nuri al-Maliki, a Shiite, to power, leave Jalal Talabani, a Kurd, as president and place a Sunni Arab from Iyad Allawi's Iraqiya bloc as parliament speaker.

Allawi was due to head a national council on strategic policies, a position that US officials said would allow for checks on the government's direction.

But after electing Osama al-Nujaifi as speaker, about 60 members of former prime minister Allawi's Iraqiya bloc walked out to press for the reinstatement of three fellow members barred for alleged links to Saddam Hussein's regime.

On the flight to Japan, the next stop in Obama's Asian tour, the president called both Maliki and Massud Barzani, the president of the Kurdistan regional government.

Obama congratulated Maliki "on the steps taken to form an Iraqi government, and underscored the importance of finalizing a government that is broad-based, inclusive and reflects the will of the Iraqi people," according to a White House statement.

Obama also thanked Barzani "for his efforts to advance government formation, and reiterated the importance of advancing the substantial progress toward forming a broad-based and inclusive government.

He told both leaders that Washington "was committed to strengthening our lasting partnership with the Iraqi people as they move beyond this important milestone in their history," the statement read.

"This looks like a good outcome for those working for a stable, peaceful Iraq and a bad result for those whose agenda is more sectarianism and violence," said Anthony Blinken, Biden's national security adviser.

A senior administration official said the agreement to form an inclusive government was "a strong rejection of interference of negative external influences in the region."

"Of course, I'm speaking specifically about Iran's attempts to engineer an Iraqi government that was based on a unified sectarian Shia list that would have been a narrow government and not representative of the government of Iraq," the official added.

Allawi's faction won the most seats in the elections, but he failed to gain the prime minister's post.

During calls last week, Obama discussed the possibility of Kurds giving up the presidency in favour of Allawi as an option, a senior administration official said.

But in the end, the parliament speaker post combined with the chairmanship of the strategic policy council proved sufficient to bring Allawi into the new government.

The officials said negotiations remain on distributing positions before the new government can be formed.

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