KIRKUK - Iraqi special forces led an operation on Tuesday aimed at retaking the militant-held town of Qayyarah, a key staging base for operations to attack Mosul, military sources said.

Qayyarah lies on the western bank of the Tigris river, about 60 kilometres (35 miles) south of Mosul, the Islamic State group's last major urban stronghold in Iraq.

With the clock ticking down on what Iraq expects to be its biggest anti-IS operation yet, the UN warned of population displacement on a scale not seen in years. "The operation started at dawn with the participation of Counter-Terrorism Service (CTS) and army forces," Brigadier General Firas Bashar told AFP.

US-led coalition aircraft provided support, said Bashar, the spokesman for the operations command in Nineveh, the province in which Qayyarah and Mosul are located. "The operation is ongoing and currently achieving its goals," CTS spokesman Sabah al-Noman said.  "Qayyarah will be cleared and the operation wrapped up quickly, bolstering our plans... for the final battle to liberate Mosul," he told AFP.

He said Iraqi forces had been working with armed residents inside the town for this offensive, a rare occurrence. "There has been coordination with groups of armed residents inside," Noman said, declining to provide further details.

Iraqi forces have spent weeks positioning themselves around the town, which is expected to be used as a launchpad for a broader operation against Mosul in the coming weeks or months.

The United Nations' refugee agency (UNHCR) said that 200,000 Iraqis had already been forced to flee their homes this year and warned that Mosul could trigger an unprecedented crisis.

"Worse is yet to come," the UNHCR representative in Iraq, Bruno Geddo, said. "We predict that it could result in massive displacement on a scale not seen globally in many years." Nearly 3.4 million people have already been displaced in Iraq since the start of 2014.

Mosul is Iraq's second city and had an estimated population of around two million before IS took it over in June 2014 in an offensive that sparked large-scale displacement.

Accurate numbers for the population remaining in the city are hard to come by but the UN and other officials have said that up to one million civilians may still be living under IS rule in the Mosul area.

"We are building new camps and pre-positioning emergency relief kits to ensure people fleeing get rapid assistance," Geddo said. "But even with the best-laid plans, there will be insufficient camps for all families needing shelter and we need to prepare other options," he added.

Saleh al-Juburi, the mayor of Qayyarah district, said around 15,000 civilians were believed to be trapped under IS rule in the Qayyarah area. "There are plans to bring food and medical supplies to those who are still in their homes and did not manage to escape Qayyarah," he told AFP. "We will distribute this aid immediately after the liberation of the town."

Juburi said CTS forces were making quick progress in Qayyarah and had already retaken key landmarks in the town hours after the launch of the operation. "Most of the Daesh (IS) fighters have been killed or have fled," he said.

After retaking Fallujah, west of Baghdad, in June, the main focus of Iraqi security forces is Mosul, which is IS's de facto capital in Iraq.

The Iraqi authorities and the aid community, including the UN, came under criticism for failing to cope with the much smaller influx of people displaced from Fallujah.