Why is there a much bigger split between Sefardim and Ashkenzim and not, say, between Sefardim and people who lived in Bavel? The distance between Spain, and say, Israel should have been big enough to make it hard to come to a consensus among their poskim as to a common psak.
I think the main issue is not how close/far they were from one another, but who was in charge. By and large, Sepharadim were under Muslim rule, which allowed them freedoms that were not given to Ashkenazim by their Christian overlords. It was more of an Iron Curtain barrier than a distance barrier.
One might also note the consistency with which Sepharadim followed the same Posekim, as contrasted with the many upstart communities in Ashkenaz that followed local Rabbeim whenever it was too difficult to send communications long distances.
Another point to add to Seth's:
Jewish communities have gotten pretty "mixed up" over time. Ashkenazic Jewry basically descends from the Italian communities of the early Middle Ages, and some historians trace them and their traditions back to the Jews of Eretz Yisrael (as contrasted with the Sephardim, who derive their traditions from the Jews of Babylonia). But the ancient Jewish communities of Eretz Yisrael were basically wiped out by the Crusaders, and the Jews who resettled it were largely Sephardim, especially after the expulsion from Spain. Hence the similarities between Spain and Israel.
(Something similar happened with France as well. Its old Ashkenazic communities were dispersed during the expulsions of the 14th century; the reconstituted communities of the 17th and 18th centuries were again mostly Ashkenazic, but most of them were lost to assimilation, and the rest were destroyed during the Holocaust; the bulk of present-day French Jews are Sephardim from North Africa.)
That said, there has been a fair amount of cross-fertilization too. You mention the Spanish Reconquista in your comment, and that indeed was part of what made it possible for Ashkenazic styles of learning (such as the methods of Tosafos) to enter Spain, and conversely, for Spanish influences (such as piyut) to travel north. Even earlier than that, though, the French Rabbeinu Gershom studied (directly or indirectly) under R. Hai Gaon of Babylonia, and conversely, the Italian "Four Captives" taught in Spain and other countries under Babylonian influence.
The relationship between Sepharadim in Spain or Morrocco and those in Iraq (which is, as you say, a long distance) has a lot to do with the fact that when the Jews were kicked out of Spain in 1492, they traveled all over the Mediterranean, reaching North Africa, Israel, Greece, Turkey, and Italy. From Israel they migrated to places like Syria and Iraq. Additionally all of these lands were a part of the Ottoman Empire, so there was a lot of freedom to travel without crossing borders.
The rabbis coming from Spain were very frequently greater scholars than any pre-existing mustarabim (Jews indigenous to these Arab countries) in these countries, and so their minhagim took over.
By the way, one can find quite a bit of variation in psak between different Sephardic communities today, moreso than among (non-Chassidic) Ashkenazim. A large part of the reason for this is because of the way the Ashkenazic community rebuilt and reorganized itself after the Holocaust in the United States and in Israel.