The outgoing government has faced criticism that by alienating the Sunni Arab minority, it helped create conditions that revitalised Sunni militants including the Islamic State (IS) group, which led a June offensive that seized much of the Sunni heartland.
Washington and the United Nations have repeatedly called on premier-designate Haidar al-Abadi to form a broad-based government.
Giving Sunnis a greater stake in power could help encourage them to join a counter-offensive against the jihadists.
New UN human rights chief Prince Zeid Ra'ad Al Hussein said the atrocities IS had committed in areas under its control had already shown Sunnis that jihadist rule promised only a "house of blood", while the head of Egypt's prestigious Al-Azhar religious institution also condemned the group.
The key parliament session was due to open at 1700 GMT and end with a vote on a new government line-up.
There has been no word from Abadi's office on the names to be put to lawmakers, and the political horse-trading was expected to go down to the wire.
"I expect changes to occur until the final moments," said Samira al-Mussawi, an MP from Abadi's State of Law alliance.
She said there were persistent "differences over... positions such as deputy prime ministers and some of the key ministries, such as defence and interior".
Kurds debate participation
The issue of Kurdish participation in the government is perhaps the biggest potential sticking point, and their delegation flew from Baghdad to the city of Sulaimaniyah in Iraq's autonomous Kurdish region Monday to discuss the issue with senior political leaders.
"This will be the final meeting about participating or not participating in the next government," Nechirvan Barzani, the prime minister of the region, told reporters before heading into the talks.
US Deputy Secretary of State for Near Eastern Affairs Brett McGurk and UN Iraq envoy Nickolay Mladenov also attended the meeting, an official from the Kurdish Goran Movement said.
With Shiite militiamen playing a key role alongside the regular army in fighting the jihadists, one of their commanders is apparently seeking to turn military gains into political capital, which could complicate efforts to bring Sunnis on board.
Shiite lawmaker Ammar Toma told AFP that outgoing transport minister Hadi al-Ameri, who heads the Badr militia that has close ties with Iran, was being considered for the interior portfolio, which would put him in charge of most of Iraq's security forces.
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In the previous government, key security ministries were left vacant and run by acting ministers.
Toma said he still expected the political bargaining to be completed in time for the vote to go ahead as planned.
Obama to announce strategy
Obama, who made his political career opposing the war in Iraq and pulled out US troops in 2011, promised to unveil a long-awaited strategy on Wednesday to tackle IS in both Iraq and neighbouring Syria.
"We are going to systematically degrade their capabilities. We're going to shrink the territory that they control. And ultimately we're going to defeat them," Obama said in an interview aired Sunday on NBC's "Meet the Press".
He said he would not announce the return of US ground troops to Iraq and would focus instead on a "counter-terrorism campaign".
But the difficulties Washington faces were underlined by a report from a Britain-based research group which found that IS fighters were using captured US military-issue weapons supplied to other rebel groups in Syria by Saudi Arabia.
'House of blood'
Prince Zeid, the first Muslim and Arab to serve as UN High Commissioner for Human Rights, said that IS had already shown the world what its rule would be like if it was left unchecked.
"It would be a harsh, mean-spirited house of blood," he said in his maiden speech to the UN Human Rights Council. IS "has demonstrated absolute and deliberate disregard for human rights".
The bloodshed continued on Monday when gunmen and suicide bombers attacked the town of Dhuluiyah, north of Baghdad, killing 18 people, police and a doctor said.
Sheikh Ahmed al-Tayyeb, the head of Egypt's Al-Azhar, Sunni Islam's highest seat of learning, also sharply criticised IS jihadists, calling them "criminals" transmitting a "tarnished and alarming image of Muslims".
Arab foreign ministers agreed Sunday to take "necessary measures" against the jihadists, but stopped short of explicitly backing the US air campaign launched in Iraq on August 8.
Washington expanded its air strikes to the Sunni Arab heartland over the weekend, hitting IS targets around a key dam on the Euphrates that troops have been battling to defend with the support of allied tribes.