* Fighting began after small explosion overnight

* Road cut between Baghdad and oil city Kirkuk

* Tensions risk further fragmentation amid IS threat

(Updates death toll, adds detail)

KIRKUK, Iraq, April 24 (Reuters) - Clashes between Kurdish and Shi'ite Turkmen paramilitary forces broke out late on Saturday in northern Iraq, killing at least eight people and cutting a strategic road between Baghdad and the oil city of Kirkuk, security and medical sources said.

Violence in Tuz Khurmatu, about 175 km (110 miles) north of the capital, has become a near monthly occurrence between the armed groups, uncomfortable allies against Islamic State since driving the jihadist militants out of towns and villages in the area in 2014.

A small explosion just before midnight near the local headquarters of two rival political parties sparked armed exchanges between the communities that spread to most neighbourhoods and continued into Sunday morning, according to security sources.

Fighters launched mortars into densely populated areas and fired rocket-propelled grenades and heavy machine guns at the opposing positions. Unverified photos published by a Shi'ite militia group showed flames engulfing a tank on a main road and heavy black smoke rising from a residential area.

Five Shi'ite fighters and three members of the Kurdish peshmerga forces, including a senior commander, were killed and at least two civilians, including a child, were wounded, security and hospital sources said.

The death toll was expected to rise since snipers were preventing people from transporting casualties to hospital.

The tensions risk further fragmenting Iraq, a major OPEC oil exporter, as it struggles to contain Islamic State, the biggest security threat since a U.S.-led invasion toppled autocrat Saddam Hussein in 2003.

Efforts to push back the ultra-hardline Sunni jihadists have been complicated by sectarian and ethnic rivalries, including a contest for territory which the Shi'ite-led government in Baghdad claims, but the Kurds want as part of their autonomous region in the north of the country.

High-level delegations from both sides arrived in Tuz Khurmatu on Sunday to try to solve the latest dispute as military reinforcements were said to be gathering outside the district.

(Reporting by Mustafa Mahmoud in Kirkuk and Ghazwan Hassan in Tikrit; Writing by Stephen Kalin; editing by John Stonestreet) ((stephen.kalin@thomsonreuters.com; +964 790 191 7023; Reuters Messaging: stephen.kalin.thomsonreuters.com@reuters.net))