India drawn to Iran's favorable oil terms: minister

NEW DELHI (Reuters) - India wants to take as much Iranian oil as it can because terms are "favorable", Oil Minister S. Jaipal Reddy said on Monday, after talks between the two sides last week on payment options for $12 billion of crude a year following fresh U.S. sanctions.

"It will be our endeavor in future to tap the Iran source fully because the terms are fairly favorable," Reddy told journalists at an energy conference, adding India was exploring all options to pay for the crude.

India, the world's fourth-largest oil consumer, buys around 12 percent of its oil from the Islamic Republic. It pays through a Turkish bank after a previous clearing mechanism was shut down in December 2010.

But tougher U.S. sanctions signed into law on December 31 in a further bid to pressure Iran to rein in its nuclear ambitions make the route through Halkbank vulnerable.

An Indian delegation went to Tehran last week to discuss options and the two sides have agreed India could use its restricted rupee currency for some of the payments, a government source said on Friday.

An industry source confirmed on Monday that India was considering rupee payments while ruling out the possibility of paying in yen.

A rupee account for Iran could be used to settle Tehran's imports from third countries, the industry source said. "It will be an extension of the rupee arrangement wherever possible," the source said on condition of anonymity.

"Iran was very accommodative," Reddy said, adding that India respected United Nations sanctions but "we don't go by sanctions imposed by regional blocks, by certain nations."

On Monday, the European Union banned imports of oil from Iran and imposed a number of other economic sanctions, joining the United States in new measures aimed at deflecting Tehran's nuclear development program.

Washington suspects Iran of trying to make nuclear weapons but Tehran rejects the charge and says its program is for peaceful means.

The United States also wants buyers in Asia, Iran's biggest oil market, to cut imports to put further pressure on its economy, in what Russian Foreign Minister Sergei Lavrov has called a "strangling effect" to trigger popular discontent.

"We go by our interest," Reddy said. "Iran is the second-largest supplier (to India) so we need to utilize that source."

Iran currently offers Indian refiners 90 days of credit, more than other major suppliers. Term contracts run from April 1 to March 31.

The unprecedented effort to take Iran's 2.6 million barrels of oil per day off international markets has kept global prices high, pushed down Iran's rial currency and caused a surge in the cost of basic goods for Iranians.

Iran is the world's No. 5 oil exporter and a regional rival to fellow OPEC member and leading exporter Saudi Arabia, which has said it could pump more oil to respond to any emergencies.

Indian refiners, like other buyers in Asia, have been looking to diversify crude supplies from Iran.

China, Iran's biggest customer, cut imports in January and February over contract terms and has been looking for alternative supplies.

(Writing by Jo Winterbottom; editing by Jason Neely)