ROME - The United States and Italy warned Tuesday that the Islamic State (IS) group is expanding its reach, threatening to seize Libya and launch attacks in Western countries.

But as representatives from the 23 countries of the US-led coalition battling the militants' self-declared "caliphate" reviewed their progress at talks in Rome, Italy and France made it clear military action against IS's Libyan wing is not on the immediate agenda.

Italian Foreign Minister Paolo Gentiloni and US Secretary of State John Kerry opened the talks by telling their allies that, since their meeting six months ago, the IS group had suffered setbacks in its core territory in Syria and Iraq.

But the hosts warned that the group is adapting to the pressure on its heartland and is redirecting its efforts towards Libya, where it has seized new territory, and into attacks like those in Paris, Ankara and San Bernadino, California.

"We are surely not here to brag about anything," Kerry said, after saying IS fighters have lost 40 percent of their territory in Iraq and 20 percent in Syria. "We're here to recommit, we're here to re-evaluate, we're here to make judgements about things we have started that we could do better," he said. Gentiloni said the challenge facing the coalition of mainly Western and Arab nations is stark. "We know that we have in front of us an organisation that is very resilient and able to plan strategically and so we should not underestimate it," he said. "If anything we need to be ever more wary and more watchful because we know that the more Daesh is squeezed in its core territories, the more tempted it is pursue its terrorist activities elsewhere," he warned, using an Arabic acronym for IS. "We are witnessing renewed activity in Libya and in sub-Saharan Africa," he said. Within the coalition, Italy has taken the lead in planning how to address the IS threat which is just a short boat ride from its southern shores, in and around the Libyan city of Sirte.

Rome's focus is on trying to rally the international community behind efforts to create a national unity government in Libya that is capable of stabilising its former colony.

Meanwhile, US Defence Secretary Ashton Carter will preview the Pentagon's plans for its 2017 budget, including extra cash to fight the Islamic State group, previously secret mini-drones and a beefed-up US presence in Europe's east.

The base budget for fiscal year 2017 is expected to be $524 billion, augmented by $59 billion for an "overseas contingency fund" to pay for ongoing military actions in Afghanistan and against IS, defence officials told AFP on Monday.

With an unusual choice of language, US Secretary of State John Kerry waded into Islamic theological debate on Tuesday when he branded the Islamic State group “apostates.” The United States affords its citizens religious freedom and does not consider apostasy a crime, but Kerry chose the term to rubbish the jihadists’ claims of piety. “Daesh is in fact nothing more than a mixture of killers, of kidnappers, of criminals, of thugs, of adventurers, of smugglers and thieves,” he declared using the Arabic acronym for the IS group.

“And they are also above all apostates, people who have hijacked a great religion and lie about its real meaning and lie about its purpose and deceive people in order to fight for their purposes.” Some Muslim legal scholars consider the proper punishment for turning one’s back on the faith to be death and several majority Islamic countries execute convicted apostates.

The IS group claims to have founded a “caliphate” based on its interpretation of Islamic sharia law and itself often brands its Muslim enemies apostates. Kerry was in Rome on Tuesday for a meeting of the 23 nations at the core of the US-led coalition fighting the IS group in Iraq and Syria and supporting local forces.

The end of a news conference by Kerry and Italy’s foreign minister Paolo Gentiloni was briefly disrupted by protesters alleging US policy had caused the jihadists’ rise.

America's gargantuan military budget far surpasses that of any other country, and exceeds the combined defence spending of the next eight biggest militaries in the world.

Moreover, the US-led coalition fighting Islamic State aims this year to recapture Iraq's second city Mosul, working with Iraqi government forces, and drive the militants out of Raqqa, their stronghold in northeast Syria, Arab and Western officials say. If it succeeds, the coalition will have struck a crippling blow against Islamic State's self-proclaimed caliphate in Iraq and Syria.

The strategy is to regain territory at the heart of IS's cross-border state, take both its "capitals", and destroy the confidence of its fighters that it can expand as a caliphate and magnet for jihadis, according to these Arab and Western officials, few of whom were willing to speak on the record on a matter of such strategic sensitivity.

"The plan is to hit them in Raqqa in Syria and in Iraq at Mosul, to crush their capitals," said an Iraqi official with knowledge of the strategy. "I think there is some speed and urgency by the coalition, by the US administration and by us to end this year with the regaining of control over all territory."

"Iraqi officials say 2016 will witness the elimination of Daesh (IS) and the Americans have the same idea - get the job finished, then they can withdraw and (President Barack) Obama will have a legacy," said a diplomat in Baghdad, emphasising the Iraqi part of the operation. "The day Mosul is liberated, Daesh will be defeated."

The war against jihadi insurgents in this turbulent region has had its twists and turns but there is a palpable sense in Baghdad that the tide has turned against IS.

In the year after the jihadis' summer 2014 surge back into Iraq from the bases they managed to build amid the chaos of Syria's civil war, IS momentum as a rapid, flexible and brutal military force seemed unstoppable.

But in the past nine months IS has lost swathes of territory and strategic towns. In Iraq it was driven out of Tikrit and Sinjar in the north, the oil refinery town of Baiji in central Iraq, and Ramadi west of Baghdad in Anbar province, the heart of insurgency after the 2003 US-led invasion that toppled Saddam.

In northern Syria, US-allied Kurdish militia of the People's Protection Units (YPG) have taken vital territory and border crossings below the frontier with Turkey, after breaking a long IS siege at Kobani and later taking Tel Abyad, north of Raqqa and a key supply line for the jihadi capital.

"Daesh are losing their ability to hold onto territory in Iraq and to stage the kind of complex attacks that allow them to hold the towns they seized," said a US official, adding that the recapture of Mosul would start in 2016.

Lieutenant-General Sean MacFarland, Baghdad-based head of the US-led coalition, emphasised to a group of reporters last month the twin-pronged approach to operations against IS in Iraq, "in conjunction with something we might have going on over in Syria about the same time (and) see if we can put pressure on the enemy in two places at once and create a dilemma."

Hisham al-Hashemi, an Iraqi expert on IS who advises the Iraqi government on the group, points out that as a result of last year's setbacks "out of seven strategic roads between Iraq and Syria they (IS) now have one; they cannot move with ease and Turkey has tightened the noose on them."

IS is under pressure across many other fronts apart from its ability to deploy. The collapse in oil prices has dented its revenue from oil smuggled, now through a less permeable Turkish border, from captured Syrian and Iraqi fields.

Coalition air strikes recently incinerated a stockpile of cash from looting and kidnapping, taxation and extortion, forcing IS to cut wages. It is losing top cadres. More than 100 mid-level to senior leaders have been killed since May, according to coalition spokesman Colonel Steve Warren, who says that "works out to an average of one every two days".

"The place where they were holding huge cash reserves was targeted and destroyed," the diplomat told Reuters. "Daesh will be defeated in Iraq. It is not a question of if but when," added another senior Western diplomat in Iraq.

A top Iraqi official, speaking on condition of anonymity, said the Mosul operation would require delicate collaboration between the US air force, the Iraqi army, local tribal forces, and Peshmerga fighters from the self-governing Kurdistan Regional Government east of the city.

"Most likely, coalition special forces will be embedded with the Iraqi forces and the Peshmerga will close on Mosul from the north and east."

In Syria, he said, the likely combination would involve coalition air strikes with special forces and US-led covert missions operating alongside mainly Kurdish fighters of the YPG and other Syrian rebels. "They have some special forces on the ground in Syria in Hasaka, on the outskirts of Raqqa with the rebels," the Iraqi official said.

An airstrip at Hasaka is being prepared by the United States for this purpose.

The official warned, however, of the need for coordination with Russia, which brought its air force to Syria last September to shore up the Iran-backed rule of President Bashar al-Assad, and is using an airstrip in Qamishli further north, but focusing most of its fire on mainstream and other Islamist rebels rather than IS.

This "competition between the two superpowers is really very, very dangerous", he said. "There must be coordination (around) the complex operations that will take place."

Yet even in the unlikely event that all these plans go like clockwork, that alone would not put an end to IS. The group, IS experts say, has become expert at defencive warfare, and is spreading its tentacles from Europe to North Africa.

Inside the recaptured city of Ramadi the Iraqi army found a warren of underground tunnels the jihadi forces used for shelter, mobility and escape. Mosul, a far bigger city with one million people and a river on one side, is heavily defended and tunnelled, with berms, trenches and hidden bombs.

Abu Bakr al-Baghdadi, the IS "caliph" still based near Mosul, has already begun to anticipate tactical reverses.

Arab and Western security sources say he has recently sent several hundred of his top lieutenants to Libya, to consolidate the existing IS bridgehead there amid the chaos of a splintering country, and to offset diminishing revenue in Syria and Iraq by creaming off Libyan oil resources.

Coalition dependence on Kurdish forces in both northern Syria and Iraq, and the Iraqi army's reliance on Iran-backed militia up until the reconquest of Ramadi by regular forces, were and are being exploited by IS as a means to rally Arab grievances.

Battlefield success will count for little, officials and diplomats say, without political reconciliation and power-sharing to heal the wounds opened in the ethno-sectarian bloodletting that followed the overthrow of Saddam's minority Arab rule in 2003.

Islamic State, whose forerunner first emerged as a reaction to the US installation of Shia majority rule in Iraq, twisted the sectarian knife in the country.

But after the fall of Mosul, then prime minister Nouri al-Maliki, leader of the Dawa party, who had alienated the Sunnis by tearing up a power-sharing pact with them and the Kurds, was pushed aside. He was replaced by a more conciliatory Dawa leader, Haider al-Abadi.

Most observers give Abadi credit for trying to be more inclusive by negotiating oil revenue sharing with the Kurdistan Regional Government, proposing a National Guard, under which the different sects and ethnic groups would police their areas, and setting out a vision of a decentralised, federal Iraq.

Yet Abadi has shown signs of independence, from his party and its Iranian patrons.

Baghdad is abuzz with the story of how the prime minister recently ejected Major General Qassem Soleimani from a national security council meeting. The Iranian Revolutionary Guard commander had until recently been photographed often on the frontlines in Iraq and Syria.

The critical question, however, is whether Abadi can build up the army and regular security forces enough to establish control over Shia militias under the sway of Tehran, accused by Sunnis of human rights abuses when they spearheaded the attacks on Baiji, Tikrit and Diyala last year.

Even if Mosul works, Abadi will still have to move quickly to provide things his corrupt predecessors were unwilling or unable to give to Iraqi citizens in general and disgruntled Sunnis and Kurds in particular.