By John Walcott

WASHINGTON (Reuters) - President Barack Obama and some administration officials have hailed recent military gains against Islamic State in Iraq and Syria, but other U.S. officials and outside experts warn that the U.S.-backed air and ground campaign is far from eradicating the radical Islamic group, and could even backfire.

While Islamic State’s defeats in Iraq and Syria have erased its image of invincibility, they threaten to give it greater legitimacy in the eyes of disaffected Sunni Muslims because Shi'ite and Kurdish fighters are a major part of the campaign, some U.S. intelligence officials argue.

A second danger, some U.S. officials said, is that as the group loses ground in the Iraqi city of Falluja and elsewhere, it will turn increasingly to less conventional military tactics and to directing and inspiring more attacks against "soft" targets in Europe, the United States and elsewhere.

One U.S. intelligence official, who spoke on condition of anonymity, warned that in response to losing Falluja and other cities the group likely would turn more to guerrilla tactics to disrupt efforts to restore government services.

"We can expect ISIL to harass local forces that are holding cities it previously controlled, thereby drawing out battles into protracted campaigns,” he said.

The territory held by ISIL has enabled it to build up revenues through oil and taxes, provided it a base to launch attacks on Baghdad, and acted as a recruiting tool for foreign fighters drawn to the self-proclaimed Islamic caliphate.

President Barack Obama said on June 14 -- two days after a gunman pledging allegiance to Islamic State killed 49 people in Orlando -- that the militant group was losing "the money that is its lifeblood" as it continues to lose territory.

Brett McGurk, the presidential envoy for the Global Coalition to Counter ISIL, told a White House briefing on June 10 that the group has lost half the territory it had seized in Iraq, about 20 percent of its self-proclaimed caliphate in Syria, and at least 30 percent of its oil production, which accounts for half its revenue.

But Islamic State fighters in Iraq are already showing signs of adapting a guerrilla war-style strategy, Seth Jones, an analyst with the RAND Corp, told Reuters.

“It looks like the areas that the Islamic State has lost, they are generally abandoning, and that would mean preparing to fight another day,” he said.

Despite the progress against ISIL on the battlefield and in the financial realm, CIA Director John Brennan told the Senate Intelligence Committee last week: "Our efforts have not reduced the group’s terrorism capability and global reach."

"The resources needed for terrorism are very modest, and the group would have to suffer even heavier losses of territory, manpower, and money for its terrorist capacity to decline significantly,” he said.


Hassan Hassan, a terrorism expert at the Royal Institute of International Affairs in London, told the U.S. Senate Homeland Security committee on Tuesday that the Orlando attack showed the group's territorial losses hadn't diminished its broader appeal.

"The Islamic State’s international appeal has become untethered from its military performance on the ground,” he said.

Sunnis in Iraq no longer view the ISIL radicals as liberators, and the Shi'ite role in the fighting is less important than it was a year ago, officials in Baghdad told Reuters. As a result, they said, the Iraqi army has gained Sunni acceptance and is seen less as a Shi'ite-led sectarian force than it was under former Prime Minister Nouri al-Maliki.

But the risk that offensives against ISIL involving Shi'ite forces could foment sectarian tensions and help the group have been underscored by allegations that 49 Sunni men were executed after surrendering to a Shi'ite militia supporting the army offensive to retake Falluja.

Such reports "feed into ISIL's narrative," the U.S. intelligence official said.

Former U.S. ambassador to Iraq Ryan Crocker, who visited the country in March, wrote last week in the Cipher Brief, an online intelligence publication, that extremist Shi'ite militias are on the scene in Falluja. Iranian Quds Force commander Qassem Soleimani has underscored Iran’s role in the conflict by appearing publicly on the battlefield.

As ISIL has faced military setbacks, the flow of foreign fighters traveling to Iraq and Syria has dropped significantly, according to the Global Coalition to Counter ISIL.

European counter terrorism officials said some 300-400 already have returned to Britain, raising concerns about what they called an increasing convergence of IS ideology and mentally unstable individuals.

So called "lone wolf" attackers like the Orlando shooter are Islamic State's way of "overwhelming their enemies with threats that have to be run to ground," Bruce Hoffman, a terrorism expert at Georgetown University in Washington, told Reuters. 

"That is the true intention beyond the lone wolf attacks -- to distract and overwhelm the attention of law enforcement and intelligence.”

Eliminating the threat ISIL poses will require coupling the military gains in Iraq and Syria with political and economic reforms, say U.S. officials and outside experts.

“They became a strong organization because of the political failure,” Hassan said. “My fear is that there’s so much focus on the military component, rather than on the political, and social and religious dimensions.”

(Writing by John Walcott; Additional reporting by Maher Chmaytelli in Baghdad, Mark Hosenball in London and Jonathan Landay and Yara Bayoumy in Washington.; Editing by Stuart Grudgings)