Britain ordered its financial institutions on Monday to halt all business with Iranian counterparts, including the central bank, and the United States is also expected to tighten sanctions over Tehran's nuclear program.
The British move however will not target trade in Iranian oil, a source familiar with the sanctions said. It also appeared unlikely that the US Treasury would try to cut off the Iranian banking system entirely, a move that could disrupt global energy markets and harm the US economic recovery.
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Britain said the sanctions were in response to the International Atomic Energy Agency's (IAEA) latest report on Iran, which highlighted fresh concerns about possible military dimensions of Tehran's nuclear program.
"We believe that the Iranian regime's actions pose a significant threat to the UK's national security and the international community. Today's announcement is a further step to preventing the Iranian regime from acquiring nuclear weapons," said British finance minister George Osborne.
In Washington, a US official said the Treasury Department planned to designate Iran as an area of "primary money laundering concern" on Monday, a move allowing it to take steps to isolate the Iranian financial sector further.
Henry Smith, Middle East analyst at the Control Risks consultancy in London, said the British move may not significantly affect Iran's major oil customers.
"It essentially delegitimizes the country's financial system but in reality it may not make that much practical difference. The Chinese, Indians and others will continue to engage, while many Western multinationals have already pulled out," he said.
Smith said tighter sanctions had appeared more likely than any Western attack to knock out Iran's nuclear facilities. "We wouldn't regard Israel or indeed the US as having the wherewithal to pursue the kind of military action required to destroy Iranian nuclear facilities," he said.
"It's going to affect trade finance which has a derivative effect on oil trade. That seems clear," said John Solomon, director of threat finance research at World-Check, a risk intelligence firm owned by Thomson Reuters.
"The proverbial noose has been tightened and the new sanctions will definitely have an unprecedented chilling effect on Iran's economic dealings globally, not just in Europe, not just in the UK, but even in the Middle East," he said.
It is still unclear what exact steps the US Treasury plans to take. However, the decision, which the official said was to be announced by Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner, appeared designed as a warning about the risks of dealing with Iran's financial institutions.
Meanwhile, Canada announced additional sanctions against Iran in tandem with the US and Britain.
Foreign Affairs Minister John Baird said in a statement Monday that the expanded sanctions prohibit almost all financial transactions with the Iranian government. They also add individuals and entities to the list of designated persons and expand the list of prohibited goods.
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