WASHINGTON (AFP) - The International Monetary Fund (IMF) said Friday it was preparing US$833 million (S$1.1 billion) in emergency financial assistance to Iraq as the country battles the Islamic State insurgency.

The IMF said a mission had agreed on the aid with the Iraqi government under the Fund's Rapid Financing Instrument programme, subject to IMF management approval, which is likely to come in July.

"The Fund is ready to assist Iraq in its efforts to tackle the economic impact of the conflict with ISIS (Islamic State) and the decline in global oil prices," it said.

"The armed conflict continues to strain the country's resources and has created a humanitarian tragedy, with an estimated three million internally displaced people. The violence has also caused extensive damage to infrastructure and private sector assets."

The IMF said the Iraq economy contracted 2.1 per cent last year "mainly because of the violence", and might only grow 0.5 per cent this year.

Meanwhile, the crash in oil prices has hit hard the country's foreign earnings and helped widen the government's budget shortfall.