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GENEVA, Aug 23 (Reuters) - Hundreds of thousands of Iraqis in and around Mosul could be uprooted by the military assault to retake city from Islamic State, the U.N. refugee agency UNHCR said on Tuesday.

"In Mosul we believe the displacement situation may be about to dramatically worsen," UNHCR spokesman Adrian Edwards told a briefing, saying the agency needed more land for camps.

"The humanitarian impact of the military offensive is expected to be enormous, up to 1.2 million people could be affected."

About 3.4 million people have already been forced by conflict to leave their homes across Iraq, taking refuge in areas under control of the government or in the Kurdish region, east of Mosul, Islamic State's de facto capital.

With a population at one time as large as 2 million, Mosul is the largest city under the group's control in either Iraq or Syria.

Iraqi and Kurdish forces are gradually closing on the city 400 km (250 miles) north of Baghdad, with air and ground support from a U.S.-led coalition.

Its fall would mark the effective defeat of the ultra-hardline militants in Iraq, according to Prime Minister Haider al-Abadi.

The Iraqi army is battling its way up the Tigris river and has 60 km (40 miles) left to reach the outskirts of Mosul, while Kurdish Peshmerga forces are deployed 30 km east of the city.

(Reporting by Stephanie Nebehay in Geneva and Maher Chmaytelli in Baghdad; Editing by Robin Pomeroy) ((Stephanie.Nebehay@thomsonreuters.com; +41 22 733 3831; Reuters Messaging: stephanie.nebehay.thomsonreuters.com@reuters.net; twitter @StephNebehay))