Civil servants have taken the regional and national authorities to court and demonstrated over unpaid salaries in Kurdistan, where officials have long accused Baghdad of not sending the necessary funds.
In a ruling aired on state television, the Supreme Court said the central administration would pay government workers, employees at public institutions, social benefit recipients and pensioners directly, instead of through the regional administration.
Court chief Jassem al-Omeiri said public entities "should coordinate directly with the federal government's finance ministry to implement" the change.
The case was brought by civil servants in Sulaimaniyah, the autonomous region's second city, where hundreds of teachers have also taken to the streets in recent weeks to demand compensation for unpaid salaries from last year.
In September, Baghdad had agreed to increase funds allocated to Iraqi Kurdistan, saying it would provide the northern region with three annual payments of 700 billion dinars (about $535 million).
Thanks to oil exports, the region previously had independent funding that partly covered salaries.
But a dispute involving the federal government and Turkey, through which the oil had been exported, has blocked that source of income for the regional administration since late March.
Iraqi Kurdistan and Baghdad later agreed in principle that sales of Kurdish oil would pass through the federal government. In exchange, 12.6 percent of Iraq's public spending will go to the autonomous region.
The court in its ruling also ordered the Kurdish administration to hand over "all its oil and non-oil revenues" to the federal government, and an audit of relevant accounts.
With oil revenues gone, Kurdistan's current main source of revenue is taxes collected at border crossings with neighbouring countries including Iran and Turkey, two of Iraq's main regional trade partners.
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