Iraqi forces are battling militants northeast of Baghdad, as Washington said a powerful jihadist group was "beyond anything" it has seen and that operations in Syria may also be needed.
Pentagon chiefs warned of the dangers of the Islamic State (IS), a slick, well-funded operation powered by an "apocalyptic end of days" ideology as the West reeled from the grisly execution of American journalist James Foley.
But despite the jihadists' threat to kill a second reporter if it does not halt air strikes, Washington confirmed it had again bombed the militants in northern Iraq.
Iraqi government troops and Kurdish forces launched an operation on Friday aimed at retaking the Jalawla area of Diyala province, northeast of the capital, from militants who seized it on August 11, officers said.
The operation came after Pentagon chiefs said that defeating IS, which spearheaded an offensive that overran swathes of Iraq, would require efforts across the region, including in neighbouring Syria, where the jihadists also control large areas.
"They marry ideology and a sophistication of strategic and tactical military prowess," Defence Secretary Chuck Hagel said of the "barbaric" militants.
"They are tremendously well funded. This is beyond anything we have seen."
General Martin Dempsey, chairman of the Joint Chiefs of Staff, said the group "has an apocalyptic end-of-days strategic vision that will eventually have to be defeated".
Dempsey warned the jihadist vision of a wider Muslim caliphate could "fundamentally alter the face of the Middle East and create a security environment that would certainly threaten us in many ways".
He spoke of a "very long contest" that could not be won by US military prowess alone, but only with regional support and that of "the 20 million disenfranchised Sunnis that happen to reside between Damascus and Baghdad."
The US military said it had conducted 90 air strikes in Iraq since August 8, more than half in support of Kurdish forces near Iraq's largest dam on the Tigris river north of militant-held second city Mosul.
The murder of Foley has stoked fears in the West that the territory the militants have seized in Syria and northern Iraq could become a launching pad for a new round of global terrorist attacks.
Foley, a 40-year-old journalist, was kidnapped in northern Syria in November 2012. His employer GlobalPost said his captors had demanded a 100 million euros ($A149.99 million) ransom.
GlobalPost CEO Philip Balboni said his team had never taken the demand seriously, and State Department deputy spokeswoman Marie Harf insisted: "We do not pay ransoms."
The captors had also sent Foley's family a taunting and rambling email threatening to kill him.
GlobalPost released the text, which claimed that "other governments" had accepted "cash transactions" for the release of hostages, and that the militants had offered prisoner exchanges for Foley's freedom.
Harf said the US estimated IS had received millions in ransom payments this year alone. Most are believed to have been paid by European governments.
In the execution video, released online, a black-clad militant said in a clear south London accent that Foley was killed to avenge US air strikes against IS.
A second US reporter, Steven Sotloff, was then paraded, with the militant saying he would die unless President Barack Obama changes course. Sotloff was captured on August 4, 2013.
The scale of the threat from IS became clear in June when the group, then known as the Islamic State in Iraq and the Levant, seized Mosul, a city of two million people, prompting hundreds of thousands of its residents to flee.
The jihadists went back on the offensive earlier this month, attacking mainly Christian and Yazidi Kurdish areas east and west of Mosul, in operations that triggered a new exodus of civilians that helped prompt the US air strikes.
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