I remember being in the Iraqi city of Mosul in 2003, when Saddam Hussein's troops were routed by Kurdish fighters and US Special Forces.

During the widespread looting that followed, I will never forget the sight of people picking up dinar notes that fluttered down the streets from pillaged banks. Curious, isn't it, how recent history in Iraq has a nasty habit of repeating itself.

On Monday, Mosul's banks were again being emptied, this time by fighters from a Sunni Islamist rebel group, of 500 billion Iraqi dinars, the equivalent of £256m. Not only did this make these Islamist rebels among the richest terror groups ever but marked another historical footnote in what is already being dubbed Iraq War III.

Loading article content

Just to quickly recap and fully emphasise the gravity of the current situation: in only a matter of days Iraq's second-largest city of more than 1.8 million people has been overrun by the Islamic State of Iraq and al-Sham (ISIS), the al-Qaeda affiliate that broke away in April 2013 to fight its own war.

In that short time ISIS has now come close to achieving its dream of a caliphate - an Islamic state led by a supreme religious and political leader known as a caliph (successor) to Muhammad and the other prophets of Islam - reaching from the Mediterranean coast of Lebanon to Iran's Zagros Mountains.

All this has happened barely two and half years after the completion of a US withdrawal that supposedly brought an end to the last Iraq War.

I say supposedly because most ordinary Iraqis never saw it that way, and for some time now have been warning their country was in meltdown. Not that many within Western corridors of power were listening, given prevailing thinking that the Iraq War debacle is best left forgotten.

Now it has come back to haunt Washington and London with a vengeance. Yesterday, Iraqi Kurdish forces were back in the fray, holding the northern oil city of Kirkuk after government troops abandoned their posts in Mosul in the face of the ISIS advance that has taken Islamist rebels to within an hour's drive from Baghdad.

There, in another terrifying scene full of deja vu, Shi'ite militia are mobilising for a potential replay of the ethnic and sectarian bloodbath of 2006-2007. Anyone who thinks such an offensive and objective is beyond ISIS's military capabilities might consider that, in taking Mosul, the Islamist rebels confronted and routed an Iraqi government force 15 times their size.

How did it come to this and where might this latest regional catastrophe lead?

Operating from its consolidated bases in Syria's Raqqa province, ISIS has clearly planned long and hard for it latest campaign in Iraq.

In fact, all the early warning signs were flagged up in January when the rebels overran the city of Fallujah, exploiting tactical miscalculations by the Iraqi government to capture this highly prized city lost to US-Iraqi troops in a bloodbath some years ago.

The Mosul assault this week, though, was a totally different affair strategically aimed at turning up unprecedented pressure on Iraqi government control across the north of the country.

As far back as the days of al-Qaeda in Iraq and its predecessor, Jamaat al-Tawhid and Jihad, founded by Abu Musab al-Zarqawi, militancy has had a presence in the country's Anbar province and, indeed, in Mosul.

Throughout the Iraq War, American forces considered Mosul one of the key conduits for foreign al-Qaeda in Iraq fighters to enter the country. Most of ISIS's commanders and footsoldiers alike are Iraqi, including its chief, Abu Bakr al-Baghdadi. Its recent battlefield success results largely from the fact local forces and tribes have aided or declined to resist the group's incursion into Mosul.

Without this local support it is doubtful ISIS would have been able to rout the Iraqi forces in the area with only 1,000 to 2,000 fighters.

For now, we can expect to see ISIS keep up the momentum of its push while the Iraqi government is scrambling to recover from significant losses. Weapons, vehicles and cash gained along the way will help, as will the new recruits freed from local prisons in Mosul and elsewhere.

For his part, Iraq's Prime MinisterNouri al-Maliki and his government will seek as fast as possible to secure Baghdad and the country's oil infrastructure before pushing north to meet ISIS units approaching from Mosul down the Tigris River Valley.

One potential advantage Mr al-Maliki has is help from Peshmerga Kurdish security forces, who yesterday secured the oil city of Kirkuk. Kurdish assistance, however, will come at a political price satisfying their territorial ambitions and desire for access to energy resources.

As for where all this is leading, the regional implications could be profound. Not only will events in Iraq influence the Syrian battlefields where ISIS holds considerable sway, but countries such as Jordan and Turkey, the latter of which has some of its citizens held by ISIS in Mosul, could also be drawn in.

Israel, meanwhile ,will look on anxiously at the growing jihadist threat in the Middle East neighbourhood, while predominately Shia Iran will be nervous about Sunni militancy on its doorstep.

And then there is Washington's reaction. Watch this space for more on that.