Billboards still read "Welcome to Arbil, 2014 Arab Tourism Capital," but most of the visitors Iraq's Kurdistan region welcomed last year were people made homeless by a jihadist offensive.

It was supposed to be tourism's takeoff year but the Islamic State (IS) group's June onslaught dashed those hopes overnight when it plunged Iraq into chaos.

"I cannot even talk about a decline in numbers, it's more like everything collapsed," said Hearsh Ahmad Karem, the manager of the Kurdistan Hotels and Restaurants Association.

What was a growing $1 billion (885-million-euro) sector in 2013 came to a screeching halt when IS fighters took over large parts of Iraq north and west of Baghdad and moved within striking distance of Arbil.

Plans for a new zoo, the renovation of Arbil's UNESCO-listed citadel and many similarly ambitious projects have been halted.

"Instead of getting tourists, we got IDPs," said Karem, referring to the 900,000 internally displaced persons who fled conflict in Iraq and found refuge in Kurdistan.

The autonomous three-province region has been spared most of the violence that tore Iraq apart but Kurdish peshmerga forces were mobilised en masse, transport was disrupted and the destination's image took a big hit.

"After June 10, you can't say we were the 2014 tourism capital anymore. Tourism was annihilated," said Karem.

Iraq hasn't been an obvious tourism destination in recent decades but Kurdistan has long been a holiday spot for Iraqi Arabs and was starting to draw adventure-seeking foreigners.

While the rest of Iraq mired itself in sectarian politics and corruption, Kurdistan lured investors and built up a region with most of the trappings of a functioning state.

- Hotels closing -

Spectacular waterfalls and snow-capped mountains, archaeological sites and cultural tours, as well as a no-visa policy for most Westerners meant Kurdistan could attract a broad range of visitors.

"Everything was ready, we spent a lot to welcome them," the tourism board's Nadir Rwsty said, adding that there were no reliable figures for visitor numbers last year.

Close to three million tourists visited Arbil in 2013 and estimates predicted up to four million would come in 2014.

The oil-producing region had hoped to make tourism the second pillar of its economy. Now cash is in short supply, with oil prices at a six-year low and soaring military spending.

Karem said at least 72 hotels have closed down over the past six months. He said at least as many had empty rooms and only kept their restaurants running.

The absence of tourists has affected thousands of people who worked in hotels, restaurants or as taxi drivers.

Sitting in front of his souvenir shop at the foot of the citadel in Arbil, Burwa Mohamed Aziz said he would have to close if business did not pick up soon.

"I could make up to three or four million dinars (more than $3,000) a month but now it took me four months to bring in one million," the 22-year-old said. "Consider that my monthly rent is 500,000."

He held up a pair of white "klash", the traditional hand-knitted Kurdish moccasin made of cotton and cowhide that had become a hit with foreign tourists.

"They used to snap these things up. The few Westerners I get now are Arbil residents and know how to bargain," Aziz said, shaking his head.

- Travel agents worried -

Baxtiar Sadiq Ahmed runs his own travel agency in central Arbil and specialises in high-end customised tours focusing on the region's multi-millennial history.

"Everything was going well, business was really picking up... I was expecting up to eight groups in 2014. I only had time for two before the crisis," he said.

His tours included sites beyond Kurdistan's official borders and were popular with young retirees from Europe eager to escape mass tourism and discover new cultures.

"I had prepared tours looking at the Armenian presence in the region, Jewish heritage, Assyrian history or the Yazidi shrine town of Lalesh for example," he said.

"There is so much to do, there are 700 archeological sites in Arbil governorate only."

Although visiting Kurdistan remained safe throughout the crisis, Ahmed said travel agents and their insurance companies were worried.

"Now I need to go to Europe to market my business properly and reassure them. I am ready to pay for them to come here and see for themselves," he said.