America moved to ratchet up the economic pressure on Iran after President Barack Obama promised to slap sanctions on foreign banks involved in financing crude oil purchases from Tehran.
In a move that risks infuriating China and Russia and punishing even friendly countries that buy oil from Iran, such as Turkey and India, President Obama said he would move to exclude Iran's trading partners from the US financial system.
Senior Obama administration officials said the decision represented "the strongest pressure we've had in place to date" to affect Iran's pursuit of a nuclear programme.
The legislation requires President Obama to produce a determination that the supply of oil to the world market would not be sharply reduced by the measure.
"There is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions," a presidential order said.
The move represents a significant blow against Iran's attempts to defy UN, US and EU sanctions imposed against its nuclear programme, designed to prevent Tehran from developing a nuclear weapon.
China and Russia have criticised EU and US attempts to mount an oil embargo against Iran as superseding UN sanctions. However the EU and US are now implementing measures to drastically cut Iran's overseas exports by June.
The US legislation will essentially force companies around the world to choose between trade with the US and buying Iranian oil.
Oil and gas form the backbone of the Iranian economy and are vital to the survival of the Islamic regime, which has been in power since a 1979 revolution. Iran's energy industry accounts for 70 per cent of its budget revenues. US officials said they would not speculate on the policy's impact on oil prices.
There are already signs that countries are moving to avoid US sanctions.
A day after Recep Tayyip Erdogan, the Turkish prime minister, visited Tehran, Turkey said it would cut its imports from Iran by a fifth. Banks financing Tupras, the Turkish oil refining giant, could face penalties.
Iran has been badly affected by tighter sanctions on finance, insurance, shipping and energy.
The Society for Worldwide Interbank Financial Telecommunication, Swift, expelled Iran's central bank and more than 20 other Iranian banks this month, making it almost impossible for Iran to complete large international fund transfers.
Michael Lo, an oil industry analyst at BNP Paribas, said Iran's exports were set to fall by up to 700,000 barrels per day as result of the US move.
Some countries have moved to sustain imports from Iran by bartering foodstuffs or processing payments in local currencies through domestic banks.
India, the second-biggest importer of Iran's oil, has set up a rupee account at a state-owned bank to settle as much as much as 45 per cent of its bill, according to Indian officials. China has also bartered produce.
The decision comes as a result of a law passed in December, mandating the President to decide every six months whether there are sufficient levels of non-Iranian oil to allow significant cuts in imports from Iran without damaging the global economy.
The sanctions bill allows the US government to grant waivers to nations that have significantly reduced purchases of Iranian oil.
The State Department announced that it would grant waivers to Japan and 10 EU countries, including Britain, because of steps they have already taken to cut back on Iranian oil.
A senior Obama administration official said that the other 12 countries that buy Iranian oil – including South Korea, India and Turkey – still have "an opportunity" to avoid sanctions by cutting their imports.
But the squeeze on Iran has not yet forced the Islamic regime to scale back its nuclear activities.
Russia yesterday conceded that Iran was continuing to violate UN sanctions by expanding its nuclear production at an "alarming" rate.