To by pass the constitutional blocking clauses, the Oil Ministry introduced in 1995 the "buy back" system under witch foreign contractors are paid to develop the fields in the oil that is produced, at a pre-agreed rate.

ENI was close to signing the Darkhovein contract early last year. But after the Sirri field developed by France's Total did not meet expected output levels, Iran demanded that foreign contractors should guarantee future production levels after handing over fields to the National Iranian Oil Company (NIOC) to operate.

For this reason, negotiations between the Italian giant Ente Nazionale Idrocarburi (ENI) and NIOC were bogged down over the concept of +modified buy-backs+, where penalties and incentives would be linked to performance but with a limited foreign operating role.

Eventually, the deal was to be signed last Sunday, but ENI’s Chief Executive Officer Vittorio Mincato’s trip to Tehran was suddenly delayed for reasons that either side refused to explain.

An open letter published last wee in newspapers in Tehran might have stopped Mr. Mincato to go to Tehran, sources said.

Under the ILSA, all firms that invests more than 20 millions USD in the development of Iranian energy sector would be barred from the lucrative US markets.

Sources in Rome said Washington has warned Italy over the agreement, but would not react officially until it has learned more about details.

However, ENI, which is 30 per cent owned by the Italian government, is already involved in three offshore oil and gas projects in Iran worth around $2.5 billions.

Iranian oil experts both inside and outside Iran seriously contest the accords the leader-controlled Oil Ministry sign under the "buy-back" formula and charge the government for giving "outrageous advantages" to the firms that accept to develop Iranian oil and gas fields defying US sanctions "just for the sake to demonstrate Iran can resist the American embargo".

"Oil fields have been transformed into political and factional battlefields", the independent Iranian Students News Agency (ISNA) noted.

Analysts say ENI's Darkhovein contract will net the company production of about 10,000 barrels a day over a seven-year period, small beer by the standards of the company's 1.4 million barrels a day total current output.

Mr. Mincato noted that the process for achievement of this "positive outcome" has been complex and difficult since negotiations needed "much more time than they normally do."

"We are pleased to have participated in these negotiations and feel honoured to have been granted the trust of the Iranian government which rewards ENI's remarkable experience and capabilities", Mr. Mincato said in his speech at the function for the signature of the landmark contract, that IRNA valued at US$ one billion.

"Eventually, the spirit of co-operation and the deep-rooted bonds of friendship between Iran and Italian ENI prevailed over every difficulty", he said.

AGIP, the oil upstream division of ENI that signed the contract, has been in Iran since 1956.

The project, which includes the appraisal and reservoir evaluation, will result in the development of the field to a daily production rate of 50,000 barrels per day while the second phase will further develop field to 160,000 bpd of oil and will also provide the necessary associated gas injection system.

Iran is the second largest exporter in the Organisation of Petroleum Exporting Countries (OPEC), at 3.6 million barrels per day.

Japan’s Trade Minister Takeo Hiranuma was expected to submit a "concrete" proposal to the Iranian authorities for the development of the Azadegan oilfield, the "Nihon Keizai Shimbun" newspaper reported.