ZTE Corp, China's second-largest telecommunications equipment maker, said it will curtail its business in Iran following a report that it had sold Iran's largest telecom firm a powerful surveillance system capable of monitoring telephone and Internet communications.

Reuters reported Thursday that Shenzhen-based ZTE <000063.SZ> <0763.HK> had signed a 98.6 million euro ($130.6 million) contract with the Telecommunication Co of Iran in December 2010 that included the surveillance system. (http://link.reuters.com/teb37s)

We are going to curtail our business in Iran, ZTE spokesman David Shu said in a telephone interview.

The article also reported that despite a longtime U.S. sales ban on tech products to Iran, ZTE's Packing List for the contract, dated July 24, 2011, included numerous American hardware and software products.

The U.S. makers of those products - which include Microsoft Corp, Hewlett-Packard Co, Oracle Corp, Cisco Systems Inc, Dell Inc, Juniper Networks Inc and Symantec Corp - all said they were not aware of the contract, and several said they were investigating the matter.

Shu said ZTE had decided some time ago to shrink its business in Iran, although he said the company had not yet decided on the details. It's still being discussed, he said. He also said he did not know the reason for the decision. Until the Reuters article was published, ZTE spokesmen had declined to discuss the company's business in Iran with the news organization.

Right now we cannot release more information, Shu said Friday.

A spokesman for Iran's mission to the United Nations in New York could not immediately be reached for comment.

ZTE's action would mark another blow to Iran, which is under global sanctions because of allegations it is trying to develop nuclear weapons - something the country denies. Current sanctions have not targeted Iran's telecommunications sector. But several other major equipment makers previously have announced they were going to cut back their business there.

They include European firms Ericsson and Nokia Siemens Networks, a joint venture between Nokia and Siemens, as well as China-based Huawei Technologies. The actions have not meant an immediate end to all Iranian business, however, as some firms continue to honor existing contracts that can last for years.

Shu described ZTE's business in Iran as much smaller than that of other equipment makers. Asked about the TCI contract, which included a large amount of networking gear along with the surveillance system, Shu said it was not yet completed. He said he did not know how it might be affected by ZTE's decision to curtail its business in Iran.

TCI is owned by the Iranian government and a private consortium with reported ties to Iran's elite special-forces unit, the Islamic Revolutionary Guards Corps. The company has a near monopoly on Iran's landline telephone services, and much of Iran's internet traffic is required to flow through its network.

TCI officials in Tehran either didn't respond to requests for comment or could not be reached.

ZTE is publicly traded, but its largest shareholder is a Chinese state-owned enterprise. It says it sells equipment in more than 140 countries and reported annual revenue of $10.6 billion in 2010.

Like most countries, including the United States, Iran requires telephone operators to provide law enforcement authorities with access to communications. Human rights groups say they have documented numerous cases in which the Iranian government tracked down and arrested critics by monitoring their telephone calls or internet activities.

Another ZTE spokesman said Thursday, ZTE always complies strictly with all U.N. regulations, as well as local laws and regulations of the country we operate in.

(To read the original Reuters special report Chinese firm helps Iran spy on citizens, click here: http://link.reuters.com/teb37s)

(Reporting by Steve Stecklow in Acton, MA; Editing by Michael Williams and Claudia Parsons)

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