By Laurence Norman in Brussels and Nektaria Stamouli in Athens

Greece has defied its European allies and Washington by blocking European Union sanctions on an Iranian bank the U.S. accuses of financing terrorism, officials familiar with the move say.

Athens's action last month marked the first time a European country has picked apart the sanctions regime meant to remain in place following the July 2015 nuclear accord with Tehran. The regime is designed to constrain Iran's ability to resume illicit activities and pressure it to stick by the agreement.

Prime Minister Alexis Tsipras's government undertook to rehabilitate Bank Saderat, a partly state-owned company that runs Iran's largest banking network, as Athens seeks to rebuild close economic ties with Iran, a key source of cheap energy for the country in the past.

But the move is potentially risky for Greece, which will host U.S. President Barack Obama this month. U.S. Treasury Secretary Jacob Lew warned last year that any firm that deals with Bank Saderat "will risk losing its access to the U.S. financial system."

For that reason, the end to the EU's formal sanctions on the Iranian bank is unlikely to immediately improve its prospects in Europe, where financial institutions have been reluctant to do business even with Iranian entities that were freed from sanctions under last year's accord.

But some U.S. observers worry that Greece's relief for Saderat could mark the beginning of a broader decay in European sanctions on Iran.

"This is an early sign that Europe is picking apart the nuclear accord and undermining even the terrorism sanctions they promised to enforce," said Mark Dubowitz, executive director of the Foundation for Defense of Democracies, a Washington think tank opposed to the Iran deal.

In 2007, the U.S. Treasury sanctioned Saderat as a terrorist financier for allegedly channeling money to Iran's regional proxies Hezbollah, Hamas and other Palestinian groups Washington considers terrorist. The Iranian government has previously denied any involvement by Bank Saderat and other institutions in terrorist financing. Bank Saderat didn't respond to a request to comment.

The United Nations sanctioned the bank for its involvement in Iran's nuclear and ballistic-missiles program, a move the EU matched in 2010.

Under the July 2015 multinational nuclear deal with Iran, which lifted most financial sanctions on Tehran, Saderat was one of just three banks kept on the EU's sanctions list for as long aseight years. Washington has the bank under sanctions indefinitely for terror financing.

In April, however, the EU's top court upheld the bank's challenge to the EU sanctions, arguing the 28-nation bloc had provided insufficient evidence to back up its claim that Saderat was carrying out illicit activities. The court allowed the EU to maintain the asset freeze for six months under an amended charge, a period that ended on Oct. 22.

Throughout that period, France and the U.K. worked to ensure the sanctions would be extended beyond October, seeking new evidence that Saderat was involved in illicit activities.

While there were doubts about the EU's chance of winning a fresh legal challenge, 27 of the EU's 28 governments were prepared to extend the sanctions, according to senior European and Greek officials. Greece alone was opposed.

"There is an EU court decision and it should be respected," a senior Greek foreign-ministry official said.

"There were very firm instructions from Athens to block it," a second Greek official said.

Greece's decision came despite entreaties from the U.S. to allow the sanctions to stand. While the Obama administration has been working with EU counterparts to encourage European banks to start working again with Iranian firms that are no longer under sanctions, the opposite was true for Saderat.

Congressmen with close ties to the Greek government also weighed in as Greece was warned it could pay a price if it allowed Saderat, whose office in Athens was effectively shut down after EU sanctions were imposed on Iran, to get back into business.

U.S. Treasury officials "raised concerns about the potential removal of sanctions on Bank Saderat with Greek officials and urged them not to impede efforts to reapply sanctions," a Treasury representative said.

European and Greek officials say Athens had countervailing pressures to consider.

Greece was one of Iran's biggest energy customers before the nuclear sanctions. Seeking to shore up the shattered Greek economy, the left-wing Tsipras government has been eager to rebuild political and economic ties with Tehran in the aftermath of the nuclear deal.

Mr. Tsipras was among the first Western leaders to lead a big delegation of businesses to Tehran soon after the economic sanctions were lifted in mid-January 2016. Even before that, Greece and Iran launched discussions to resume Iranian oil deliveries and started negotiating a settlement giving Hellenic Petroleum, Greece's largest refinery, more time to repay at least half a billion euros ($548 million) worth of debt it owed Iranian firms before the imposition of EU sanctions.

A month ago, Iran's central bank chief held meetings in Athens with senior bankers and the country's Vice President Yannis Dragasakis, who is overseeing the reconstruction of Greece's fragile banking system. Officials say the Saderat case was discussed.

(END) Dow Jones Newswires

November 01, 2016 16:43 ET (20:43 GMT)

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