The country stands to lose a region believed to contain 45 billion barrels of oil and as much as 211 trillion cubic feet of natural gas.
The unilateral move by the Kurdistan Regional Government in the northern city of Irbil, the Kurdish capital, will deepen the strains between Kurds and the Baghdad government.
These will intensify concerns that Iraq's Kurds, who rule three northern provinces, are taking another step toward the independence they have long sought.
Further, such a step will encourage other regions, particularly oil-rich Basra province in the south, to demand more autonomy.
Pressure for this, largely from minority Sunni regions has been building up in recent months.
This stems to a large degree on growing suspicions Prime Minister Nouri al-Maliki, a Shiite with old ties to Iran, is moving to crush his political and sectarian opponents and establish a Shiite dictatorship in Iraq.
If the demands for greater autonomy escalate, the federal Iraqi state that emerged after the 2003 U.S. invasion would splinter and Maliki's ambition of making Iraq a powerful oil state to challenge Saudi Arabia would founder.
The Kurdish zone, which is already producing modest amounts of its own oil, is increasingly at odds with Baghdad over oil revenues and its claim the Kirkuk oil fields adjacent to its territory are historically part of Kurdistan.
The Kirkuk fields contain about one-third of Iraq's declared reserves of 143.1 billion barrels and Baghdad refuses to surrender them to the Kurds, who want them to be the economic core of an independent homeland.
Twin pipelines run north from Kirkuk to Turkey's terminal on the eastern Mediterranean at Ceyhan.
The new pipeline now being proposed from landlocked Kurdistan to Turkey would run directly to Turkey without going through territory controlled by Baghdad.
The plans for the new pipeline, capable of pumping 1 million barrels per day, were unveiled in Irbil Sunday by the KRG's natural resources minister, Ashti Hawrami, during a visit by Turkish Energy Minister Taner Yildiz.
Baghdad warned the KRG that all oil deals must have the approval of the central government and that Irbil's unilateral move is thus illegal.
The KRG argues that under the constitution drawn up after Saddam Hussein's tyrannical rule was overthrown in 2003, they have the right to conclude oil deals without consulting Baghdad.
There does seem to be still some room for maneuver, since the KRG-Ankara deal has yet to be formally agreed.
Given the accelerating links between Iraqi Kurdistan and Turkey, matched by the worsening relations between Baghdad and Ankara, that may not be far off.
But as with most developments in the Middle East, this issue is mired in the complex geopolitical realities in the region and the incessant intrigues that shape its shifting alliances.
The Turks are angry with Maliki who they accuse of fanning sectarianism in Iraq in the wake of the U.S. military withdrawal in December that Ankara says could destabilize the region.
Turkish officials "also suspect Maliki … of lining up with Iran in support of Syrian President Bashar al-Assad, who Ankara says must leave office," the Financial Times observed.
Baghdad has turned on Ankara because it gave sanctuary to Tasheq al-Hashemi, Maliki's vice president and the most senior Sunni official in Baghdad.
He fled the country amid accusations of plotting against the Shiite-dominated coalition in power. He denies the charges.
Maliki's vendetta against Hashemi, who's accused of running death squads to kill Maliki's allies, is widely seen to be part of a crackdown against the premier's political rivals.
Sunni-dominated Turkey has repeatedly refused Iraqi demands it extradite Hashemi back to Shiite majority Iraq and relations have plummeted.
Turkey's warming links with the KRG undoubtedly have a lot to do with Ankara's objective of silencing Turkey's own Kurdish separatists, the Kurdistan Workers' Party, or PKK, who have been fighting for autonomy since 1984.
In recent years they have used Iraqi Kurdistan as a base and Ankara wants the KRG's help to rein in the PKK.
Crippling the group is Ankara's overriding objective. All other considerations are secondary to that. It's not at all clear the KRG's prepared to move against fellow Kurds.