(Adds U.S. reaction)
By Orhan Coskun
ANKARA, Oct 3 (Reuters) - Turkey will finance a $3.5 billion investment in Iranian gas production entirely from a state company of its own as U.S. opposition has put off foreign investors, Energy Ministry officials said on Wednesday.
The United States has objected to a gas agreement between its NATO ally Turkey and the Islamic republic, and is urging countries to cut business ties with Iran over its failure to suspend its nuclear energy programme.
Washington is spearheading a drive for a third sanctions resolution against Iran in the UN Security Council.
It also plans new unilateral actions as a means to pressure Tehran over its nuclear programme which Washington says is aimed at building a bomb and Iran says is for peaceful purposes.
The senior Turkish energy officials, who declined to be named, told Reuters the Turkish Petroleum Corporation (TPAO) will start investing in Iran's South Pars gas field project as soon as a comprehensive agreement was signed in the second half of October.
Ankara and Tehran signed a memorandum of understanding in July.
"Turkey can completely cover the necessary amount for the investment," one of the officials told Reuters. The official said TPAO had not sought credit from foreign institutions, given their unwillingness to finance projects linked to Iran.
In Washington, State Department spokesman Sean McCormack said he was not aware of the planned $3.5 billion investment by TPAO but he reiterated U.S. opposition to such a move.
"In principle, we don't think it is the right time to be investing in the Iranian oil and gas sector given the questions surrounding the activities of the Iranian government pursuing weapons of mass destruction and also being the most significant state sponsor of terrorism," McCormack said.
Turkish Prime Minister Tayyip Erdogan has defended his government's deal with Iran, saying no country can ask Ankara to give up the relationships it has with energy suppliers.
McCormack said often these deals were just an announcement of an intent to possibly invest at a later time in Iran and he wanted to know more details.
"I can't tell you where they are in this process but the Iranians like to have a lot of these announcements as a way to build the perception that all is well and normal with respect to Iran," said McCormack.
Washington has suggested Turkey, which is almost entirely dependent on energy imports, seek alternatives to Iran.
Iran is Turkey's second largest natural gas supplier after Russia.
Turkey, which is seeking European Union membership, is one of the few countries in Europe increasing energy cooperation with Iran during the heightened tensions.
European officials say new EU investment in the Islamic republic is already dwindling because of the political risk and lack of finance for major projects, while exports to Iran are falling as governments and banks cut back trade credits.
Iran rejects Western accusations it is seeking to develop nuclear weapons, saying its atomic programme is solely aimed at generating electricity so it can export more oil and gas.
The U.S. Iran Sanctions Act of 1999 says that if any foreign company invests more than $20 million in Iran's gas and oil sector it is subject to U.S. sanctions.
The Turkish energy ministry officials told Reuters TPAO was also interested in investing in Iran's oil sector after the October agreement was signed.
Every year TPAO invests some $1 billion in projects abroad, one official said.
Additional reporting by Washington bureau