IRBIL, Iraq - Islamic State forces began a powerful counterattack Monday to retake the Iraqi town of Bayji, site of the nation's largest oil refinery. The militants' assault came as Iraqi and Syrian Kurdish fighters along with heavy U.S. airstrikes continued to pound the jihadist army in northern Iraq.

If the Islamic State eventually recaptures the refinery, which can produce around 40 percent of Iraq's refined oil products, it would be a devastating blow both militarily and economically for the cash-strapped central government, which had hoped to begin gasoline production this month. In November, the Iraqi government pushed Islamic forces out of Bayji and the refinery.

In contrast, Kurdish peshmerga fighters took control of much of the town of Sinjar on Monday and continued to encircle Iraq's second-largest city, Mosul, which has been in militant hands since June. The five-day-long offensive began as an effort to break a partial Islamic State siege of a mountain range north of Sinjar and, Kurdish officials say, it expanded as Islamic State forces withdrew to the cities of Tal Afar and Mosul.

Both militants and the government Monday claimed to control the refinery complex - and neither claim could be conclusively established as local residents described the area as the scene of heavy fighting before government forces withdrew Monday morning.

"The Iraqi army and Shiite militias abandoned Bayji this morning," said Abu Ahmed al-Tikriti, a local tribal leader reached by telephone. "The Islamic State controls most of the city and the entrance of the refinery, but I do not know if they are inside."

The Iraqi Defense Ministry did not respond to a request for comment, but Iraq television stations loyal to the government denied the refinery had fallen and said fighting for control of the city was continuing.

Social media photographs and videos posted Monday morning by the Islamic States press office showed militant fighters taking control of much of the city but did not show any sign of the militants in control of the refinery.