(Adds German diplomat saying Germany not against sanctions on central bank, EU diplomat saying more discussion needed on grace period)
* Consensus emerging on phased implementation of embargo
* States worried by impact of embargo on their economies
* EU ministers due to finalise sanctions on Jan. 23
By David Brunnstrom and Julien Toyer
BRUSSELS, Jan 12 EU states drawing up details of an oil embargo on Iran have given wide backing to a proposal to allow European entities to continue to receive repayments in oil for debts they are currently owed by Iranian firms, EU diplomats said.
The 27 states are also working towards a phased implementation of a ban on imports of oil and petrochemical products from Iran.
One diplomat said a consensus was emerging that the oil import ban should come into force after six months and the petrochemical product ban after three -- similar to provisions in U.S. legislation -- but other another stressed more discussion was needed before this issue was finalised.
EU states are due to agree new sanctions on Iran over its nuclear programme at a meeting of EU foreign ministers on Jan. 23. They have already agreed in principle to ban imports of Iranian oil, but details on how and when this will be implemented still have to be finalised.
Greece, Italy and Spain, three of the weakest EU economies, depend heavily on Iranian crude. They have been pushing for long "grace periods" to fulfill existing contracts to allow them to find other suppliers before implementing an embargo and reduce any shocks to their already troubled economies.
EU diplomats said the EU's External Action Service -- equivalent to the bloc's foreign ministry -- had proposed a continuation of the practice of receiving oil from Iran to repay existing debts, and there was broad support for this.
"Some Iranian companies have outstanding debts in Europe and they reimburse their debt, not with currency but in oil," an EU diplomat said. "It is suggested that this debt could continue to be reimbursed in oil. We are talking about existing debt -- no new debt can be accumulated."
The diplomat said the argument made was that if such reimbursements were not allowed, not only would EU entities not be able to recover their money, Iran would have more oil more available to sell to boost government revenues.
"So it would be counterproductive not to allow the reimbursement of this debt," the diplomat said.
Another diplomat said the idea was based on a proposal by Italy. "It is now quite widely backed," he said.
"Because it is such a repayment, it's not a problem. It's not scandalous because it achieves what we want to, which is to dry up Iran's resources. Now work needs to be done on the details."
Another diplomat said the EU was likely to agree to review points on the oil import ban prior to implementation -- after three months and perhaps six to ensure the benefits in terms of maintaining pressure on Iran outweighed any impact on the EU or the wider oil market.
Speaking to Reuters in Rome, Italian Foreign Minister Giulio Terzi declined to comment on how long a grace period there should be on an embargo, but said Italy was not holding back the issue.
"We are in favour of a gradual application of the embargo but even so we are aiming for quite a rapid introduction," he said.
Iran has been paying back Italian oil and gas group Eni for decade-old deals with oil for years and Eni CEO Paolo Scaroni has said Eni is still owed nearly $2 billion.
The EU is also planning new sanctions on Iran's financial sector but states have been divided over including Iran's central bank in these sanctions.
Diplomats said Germany had opposed the idea, but a German diplomat denied this, saying: "Germany is actively taking part in the discussion on action against the Iranian central bank."
One diplomat said discussions were focused on finding a formula that would stop short of a full ban on dealing with the central bank but nevertheless be effective in drying up funds to Iran's nuclear programme.
Diplomats said negotiations to finalise the sanctions are expected to continue until next week.
EU measures against Iran's oil industry will complement U.S. sanctions announced on Dec. 31 that aim to make it impossible for most countries' refineries to buy Iranian crude.
Iran is OPEC's second largest oil producer after Saudi Arabia, producing around 3.5 million barrels per day.
EU countries buy nearly 600,000 barrels per day (bpd) of Iran's 2.6 million bpd in exports, making the bloc the largest market for Iranian crude, rivalling China.
The three biggest EU importers have serious debt problems. Greece imports a quarter of its oil from Iran, Italy about 13 percent and Spain nearly 10 percent. (Additional reporting by Adrian Croft in London and Roberto Landucci in Rome)