Iraq's fractious parliament has been unable to agree on whether to use an open list system in the January 16 national elections, allowing voters to select individual candidates, or a closed list that gives voters only a choice of parties which in turn determine who occupy the seats they win.

The open list system holds members of parliament accountable to their constituents while the closed list rewards party loyalty and shields individual candidates from democratic pressure.

If no agreement is reached, Iraq would be forced to revert to the closed list system used in the last polls in 2005, likely fuelling resentment among already disaffected voters and angering powerful clerics who support an open list.

"The closed list will deter voters and cause a political crisis in the country," said lawmaker Abdul Karim Al Inizi.

January's elections are seen as a crucial test for Iraq's fragile democracy just as US forces prepare to withdraw.

Violence has dropped sharply, but the polarised political scene is in a state of uncertainty as sectarian alliances that have dominated Iraq since 2005 are abandoned to make way for new blocs politicians are betting will win them votes.

The use of a relatively open list system in provincial polls last January was praised as a milestone in solidifying a transparent, accountable democracy in Iraq.

The system worked well for Prime Minister Nouri Al Maliki, whose law-and-order message resonated with voters fed up with years of bloodshed and a persistent lack of basic services.

Gains for Al Maliki's Dawa party came at the expense of rivals like the Supreme Islamic Iraqi Council (ISCI), a formidable Shiite party whose popularity has waned as Al Maliki's has grown.

It is no great surprise then that Sadiq Al Rikabi, a top political adviser to Al Maliki, says the prime minister has from the start backed an open list for January's national polls.

Senior Shiite cleric Grand Ayatollah Ali Al Sistani, whose influence among Iraq's Shiite majority is unparalleled, has issued a stern warning against a closed list system. Washington also favours an open list. On Tuesday, US President Barack Obama urged Iraq to pass the election law soon.

While few Iraqi politicians are willing to openly buck such pressure and push for a closed list system, there is resistance to an open list from large, well-organised parties who believe their chances at the polls are better with the status quo.

Wathab Shakir, a Sunni lawmaker, said some parties publicly calling for an open list were clinging tightly to the closed list system behind the scenes.

Three months before the vote, a showdown is expected between Al Maliki's State of Law coalition and former partners such as ISCI and supporters of anti-American cleric Moqtada Al Sadr, who recently formed a new bloc, the Iraqi National Alliance (INA).

"There is a great fear among the larger political blocs about the adoption of an open list. This method means that Iraqis will slap them and hold them responsible for what's happened since 2003," said political analyst Haider Al Mulla.

After months of inaction and squabbling, it is increasingly unlikely parliament will pass new legislation including a open list. A semi-open, hybrid list could be a compromise.

Baghdad (AP) Twenty families who were sent into exile in Iran by Saddam Hussain following a failed uprising returned on Thursday to Iraq, another sign of Baghdad's warming relations with Tehran.

Iraq has been delicately balancing its relations with Iran and the US. But with US troops withdrawing from Iraq by the end of 2011, the Shiite-dominated government has been working to strengthen relations throughout the Middle East, primarily with Shiite-dominated Iran.

The families, about 250 people, crossed the border near the southern, oil-rich city of Basra, the first of two groups expected to return this week, said Atheer Kamil, the head of immigration and displaced persons in Basra province.

The families were exiled following their involvement in a failed uprising against Saddam in 1991. The families, mostly from the Basra area, settled into refugee caps on the Iranian border.

Many Iraqi Shiites fled to Iran under Saddam's Sunni-dominated government. During the Iran-Iraq war, some even fought on the Iranian side against Iraq.

Nour Al Halou, 70, said he decided it was time to return to Iraq with his family.

"We heard about the bad situation in Iraq, but we were determined to go home," he said shortly after crossing the border. "We suffered a lot in the camps in Iran, and we believe that our homeland is after all better than a foreign country."

The US has long accused of Iran of training and equipping insurgents in Iraq, a charge Tehran has denied. In recent months, top US commanders have accused Iran of attempting to influence upcoming Iraqi national elections.

Violence has dramatically dropped off since 2007 in Iraq, though insurgents have continued to attack civilians and US and Iraqi security forces.

A bomb exploded on Thursday inside a crowded barber shop, killing at least five people, an Iraqi police official said.

The blast occurred while men were getting shaves and haircuts at the shop in the majority Sunni community of Youssifiyah, 20 kilometres south of Baghdad. Ten others were injured.

The official spoke on condition of anonymity because he was not authorised to release the information to the media.

During the height of the insurgency, salons were targeted for giving Western style haircuts and close shaves. Many extremists believe men should not shave their beards.

In southern Baghdad, gunmen opened fire on a checkpoint run by Sunni paramilitaries, known as Sons of Iraq, killing two, said another police official.

Meanwhile, a day after Prime Minister Nouri Al Maliki said Iraq's 640,000 security forces were straining the Iraqi budget, it appeared he was standing by the police and military.

"Without security, the state cannot speak of improving essential services and reconstruction," he told tribal leaders during a meeting in Diwaniyah, 130 kilometres south of Baghdad. "Security remains top in our priorities.".