(Reuters) - Exxon Mobil wants to leave its flagship Iraqi oil project after upsetting Baghdad by signing a deal last year with the autonomous northern Kurdish region, which the central government deemed illegal.

It wants to leave its contract to develop the giant West Qurna-1 oilfield in southern Iraq , diplomatic sources said on Thursday, because of concerns over the profitability of the project.

Exxon has informed Iraq's Deputy Prime Minister for Energy Hussain al-Shahristani and the U.S. State Department of its intentions, said two U.S. officials.

"Exxon is telling Baghdad: 'We are letting you know we're looking to leave,'" one of the diplomats said. "They are shopping around and looking at all the options.

Shahristani declined to say whether Exxon was pulling out, but told Reuters in an email that Baghdad was sticking to its line that all contract signed with the Kurdistan Regional Government (KRG) without the approval of Baghdad were illegal.

"All companies that entered in such contracts were asked to cancel them or pull out," Shahristani said.

"Exxon Mobil can be contacted about their decision."

Exxon declined to comment.

Royal Dutch Shell is the minority partner in the oilfield project. (Reporting by Peg Mackey and Timothy Gardner in Washington; editing by William Hardy)

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