BAGHDAD (Reuters) - The Iraqi cabinet approved a draft law on Wednesday which could see thousands of prisoners freed, one of the main demands of Sunni Arab politicians boycotting the Shi'ite-led government in Baghdad.

U.S. forces and Iraqi authorities each hold about 25,000 prisoners, many from the Sunni Arab community that fought an insurgency against the American-backed government after the overthrow of Saddam Hussein in 2003.

The number of prisoners soared this year amid a stepped-up military campaign in which overall violence levels have fallen.

Details of the draft law, including the number of prisoners to be freed, were not immediately revealed, and Sunni Arab leaders said they were reserving judgment. The law still needs to be approved by parliament.

"The cabinet has passed the general pardon law, which will define who is eligible to be freed from all prisons, both Iraqi and American," government spokesman Ali al-Dabbagh told Reuters.

Sadiq al-Rikabi, an adviser to Prime Minister Nuri al-Maliki, said however that the bill covered detainees held by Iraqi authorities but not those held by U.S. forces.

Freeing prisoners is one of the main demands of the Sunni Arab Accordance Front bloc, which quit the Shi'ite-led government in August.

The Americans hold overwhelmingly security detainees, most of whom have not been charged. The Iraqis hold a mixture of security detainees and criminal suspects.

BOOSTING RECONCILIATION

Dhafer al-Ani, a senior Accordance Front member of parliament, said the bloc was awaiting details.

"We have not seen the details of the draft. We are waiting to go to parliament and thoroughly check it. We hope the draft will cover the majority of the prisoners and not be limited to small numbers," he told Reuters.

"Generally speaking, we are looking at this step as an indication of the government's good intentions to normalize relations with the Accordance Front."

Iraq's national security adviser, Mowaffaq al-Rubaie, said earlier this month that the draft law was aimed at boosting reconciliation between Shi'ites and Sunnis.

U.S. commanders say they hope to free most of their detainees over the course of next year. After many months of rising detainee numbers, more are now being freed than captured, said military spokesman Lieutenant-Commander Kenneth Marshall.

U.S. forces have freed about 1,200 so far this month, while capturing about 600, he said. On average they free 50-60 a day.

The U.S. detainees are held under a United Nations Security Council resolution authorizing the American mission in Iraq, which lets the United States hold prisoners indefinitely as long as it considers them a security threat.

That resolution expires at the end of 2008, and Washington and Baghdad will have to negotiate the status of prisoners held beyond that date as part of a new bilateral agreement they have pledged to hammer out in the next few months.

Washington says it checks each prisoner's case every six months. Critics say prisoners have little recourse and cannot see the evidence used against them. Only a small proportion are ever charged or convicted of crimes.

Turkish warplanes bombed Kurdish guerrilla targets in northern Iraq in their fourth such cross-border raid in five days and the Turkish military said its offensive against outlawed PKK separatists would continue.

(Additional reporting by Mariam Karouny, Ahmed Rasheed and Wisam Mohammed)