By Kawa Omar and Ahmed Rasheed

MOSUL/BAGHDAD, Iraq, June 22 (Reuters) - The leaning al-Habda minaret that has towered over Mosul for 850 years lay in ruins on Thursday, demolished by retreating Islamic State militants, but Iraq's prime minister said the act marked their final defeat in the country's second city.

"In the early morning, I climbed up to my house roof and was stunned to see the Hadba minaret had gone," Nashwan, a day- labourer living in Khazraj neighborhood near the mosque, said by phone. "I felt I had lost a son of mine."

His words echoed the shock and anger of many over the destruction of the Grand al-Nuri Mosque along with its famous minaret, known affectionately as "the hunchback" by Iraqis.

The demolition came on Wednesday night as Iraqi forces closed on the mosque, which carried enormous symbolic importance for Islamic State. Its leader Abu Bakr al-Baghdadi used it in 2014 to declare a "caliphate" as militants seized swathes of of Syria and Iraq.

His black flag had been flying on the 150-foot (45-metre) minaret since June 2014, after Islamic State fighters surged across Iraq, seizing vast swathes of territory.

Russia said on Thursday there was high degree of certainty Baghdadi was now dead, according to RIA news agency. Moscow said last week its forces may have killed him, but Washington could not corroborate and Western and Iraqi officials were sceptical.

Baghdadi has left the fighting in Mosul to local commanders and is believed to be hiding in the border area between Iraq and Syria.

Some analysts said the destruction of the mosque could in fact speed operations to drive Islamic State out of what had been its chief Iraqi stronghold. Prime Minister Haider al-Abadi went further.

"Blowing up the al-Hadba minaret and the al-Nuri mosque amounts to an official acknowledgement of defeat," he said on his website. The insurgents chose to blow up the mosque rather than see the flag taken down by U.S.-backed Iraqi forces battling through the maze of narrow alleys and streets of the Old City, the last district still under control of Islamic State in Mosul.

In the dawn light, all that remained was the base projecting from shattered masonry. A video on social media showed the minaret collapsing vertically, throwing up a pall of sand and dust.

Defence analysts agreed the decision to destroy the mosque could indicate that the militants are on the verge of collapse.

"They had said they would fight until their last breath defending the mosque," Baghdad-based security expert Safaa al-A'sam told Reuters. "The fact is that they are no longer capable of standing in the face of Iraqi government forces."

The assailants will be freer in their attacks as they don't have to worry about damaging the mosque anymore, he said.

The minaret was built with seven bands of decorative brickwork in complex geometric patterns also found in Persia and Central Asia. Its tilt and the lack of maintenance made it particularly vulnerable to blasts.

U.S. Army Colonel Ryan Dillon, spokesman for the U.S.-led international coalition assisting in the Iraqi effort to defeat Islamic State, said Iraqi security forces were continuing to push into remaining ISIS-held territory,"

"There are two square kilometers left in West Mosul before the entire city is liberated," he told Reuters by phone.

"SYMBOL OF IDENTITY"

The United Nations' education organization UNESCO said the Minaret and mosque "stood as a symbol of identity, resilience and belonging" and deplored their destruction.

Baghdadi proclaimed himself "caliph", or ruler of all Muslims, from the mosque's pulpit on July 4, 2014.

The fall of Mosul would in effect mark the end of the Iraqi half of the "caliphate", though Islamic State would still hold territory west and south of the city. U.S.-backed militias are closing on Islamic State's Syrian stronghold of Raqqa.

The mosque was named after Nuruddin al-Zanki, a noble who fought the early crusaders from a fiefdom that covered territory in modern-day Turkey, Syria and Iraq. It was built in 1172-73, shortly before his death, and housed an Islamic school.

The mosque's military and religious history embodies the spirit of Mosul, a conservative city which supplied the armed forces with officers since modern Iraq was created, about 100 years ago, and until the fall of Saddam Hussein, after the 2003 U.S.-led invasion which empowered the Shi'ite majority.

The Sunni city balked at its loss of influence and some joined the insurgency against the new rulers of the country. When Islamic State swept into Mosul in June 2014, they were welcomed by those who saw the takeover as promising an end to harsh treatment by Shi'ite-led security forces.

The Mosque's destruction occurred during the holiest period of the Islamic holy month of Ramadan, its final 10 days. The night of Laylat al-Qadr falls during this period, marking when Muslims believe the Quran was revealed to the prophet Mohammed. Islamic State fighters have destroyed many Muslim religious sites, churches and shrines, as well as ancient Assyrian and Roman-era sites in Iraq and in Syria.

"Many different enemies controlled Mosul over the past 900 years but none of them dared to destroy the Hadba." said Ziad, an arts students. "By bombing the minaret, they proved the are the worst of all barbarian groups in history." (Writing by Maher Chmaytelli; editing by Ralph Boulton) ((maher.chmaytelli@thomsonreuters.com; +9647901917030;))