US troops mounted an ongoing major offensive last week in the town of Tal Afar, near the Syrian border, which has a large indigenous Turkmen population.
"If things continue in this way, we told them [the US side] very clearly that Turkey's cooperation on matters concerning Iraq will come to an end," Foreign Minister Abdullah Gul was quoted as saying on Monday.
"We will continue to say these things. Of course we will not stop only at words. If necessary, we will not hesitate to do what has to be done," Gul added.
He did not specify what cooperation might suffer, but Turkey is a key US ally in a largely hostile region and US forces, for example, use its Incirlik military base in the east of the country.
Turkish firms are also involved in construction and transport operations in Iraq, with hundreds of Turkish trucks bringing in goods for the US military every day.
US commanders say Tal Afar is a key staging point for foreign fighters infiltrating Iraq via minor roads from the Syrian border to the west.
The US said their air and ground assault last Thursday killed up to 57 "terrorists".
Turkey views northern Iraq as part of its sphere of influence and has close ethnic and linguistic links with the region's Turkmen minority.
Earlier, the Turkish foreign minister summoned US ambassador Eric Edelman over the situation in Tal Afar.
Edelman said that "targeted strikes" by US forces were aimed at "combatants" and not civilians.
Turkish officials say up to 500
Turkmen were killed in US attacks
"We cannot completely eliminate the possibility [of civilian casualties, but] we believe the operation is being conducted with great care," he said after briefing Turkish officials.
On Friday, Turkey's Foreign Ministry urged the US to halt its offensive in Tal Afar. The Turkish military also said it was monitoring the situation closely.
Turkish officials say Turkmen representatives put the number of Turkmen civilians killed in the conflict at up to 500, but they quote US sources as saying the toll is less than 50. No independently verifiable figures are available.
"There should not be any civilian casualties. Even a few casualties is unacceptable," a Turkish official said.
Developments in northern Iraq have put a strain on traditionally warm ties between Turkey and the US since the ousting of Iraqi president Saddam Hussein.
PKK soldiers are believed to be
hiding out in northern Iraq
Turkey is especially worried that greater autonomy for the region's majority Kurdish population could fuel separatist demands in its own mainly Kurdish southeast.
Early this month, Prime Minister Recep Tayyip Erdogan warned that Turkey's patience was running out over US reluctance to take military action against Turkish Kurd fighters hiding in northern Iraq.
About 5000 members of the PKK, now also known as Kongra-Gel, are believed to have found refuge in the mountains of northern Iraq since 1999, when the group declared a unilateral ceasefire with Ankara.
Turkey has expressed frustration over US reluctance to employ military means against the PKK fighters - which both Ankara and Washington regard as terrorists - since last October when the two sides agreed on an action plan against the PKK.