The U.S. government has forced Dubai-based Noor Islamic Bank to stop channeling billions of dollars from Iranian oil sales through its accounts, part of Western measures to curb Tehran's disputed nuclear program.

The measure cuts off another of Iran's links to the international banking system, forcing it to seek other channels to handle vital foreign currency earnings on oil sales.

The move, which took place in December, is embarrassing for traditional U.S. ally the United Arab Emirates because the bank is partly state-owned and its chairman is the son of Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum.

The impact of U.S. and European sanctions was also highlighted as traders said Iran was trying to sell about 200,000 tonnes of crude oil from a supertanker floating off Singapore, a rare move that highlights how Tehran's oil exports are being hindered.

A spokesman for Noor Islamic said on Wednesday it complied with all international regulations on Iran.

When we became aware, in December 2011, that unilateral U.S. sanctions were to be applied against a number of Iranian banks we took pre-emptive action to end our business relationships with Iranian banks licensed in the UAE, he said.

The Wall Street Journal had reported that Noor Islamic agreed in mid-December to close what people briefed on the operation characterized as Iran's single largest channel for repatriating foreign currency oil receipts.

The paper said the bank had facilitated as much as 60 percent of Iran's foreign oil sales - estimated at $80 billion - by late last year.

A banking source familiar with the matter said the bank had been winding down its positions since December and suggested other local banks had also been dealing with Iran, although Noor Islamic appeared to have carried the most volume.

The bank (Noor) made so much money out of this that they just milked it, the source said, suggesting it had handled tens of billions of dollars. It was just too good to be true.

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Iran sanctions graphic: http://link.reuters.com/qeh85s

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ECONOMIC SANCTIONS

It was not clear if other banks were under investigation but government officials confirmed Noor was the first to be targeted in the country. Turkey's Halkbank is also known to handle payments for Iran's oil sales, but Noor Islamic appears to be the first in the world to have yielded to U.S. pressure.

The world's biggest electronic bank clearing system, SWIFT, is also preparing to block the Iranian central bank from using its network to transfer funds.

The United Nations and Western countries have imposed a series of economic sanctions on Iran during the past five years over what they say are efforts by Tehran to develop nuclear weapons. Iran denies the charges.

The United States last year tightened controls on financial institutions connected to the Islamic Republic, most recently on November 21. Financial institutions around the world should think hard about the risks of doing business with Iran, U.S. Treasury Secretary Timothy Geithner said at the time.

An official at the UAE Ministry for Economic Affairs said only Noor Islamic had been targeted so far.

Of course, as the UAE government, we will comply with the U.N. resolutions, Khalid al-Ghaith, assistant foreign minister for economic affairs, told Reuters at a conference in Abu Dhabi.

He said officials were in contact with the U.S. to try to reduce any possible harm to the UAE banking system.

WORKING CLOSELY

A U.S. Treasury official declined to comment on Noor Islamic, but said the United States had worked closely with the U.A.E. government. We remain engaged with our international partners, including the U.A.E., to ensure the effectiveness of international sanctions against Iran, the official said.

In the oil market there were signs of Iran's difficulties in addition to the supertanker off Singapore, as traders said a vessel heading towards China with about 270,000 tonnes of crude oil was carrying volumes greater than the usual term-contract supplies to the world's second largest oil consumer.

Iranian light sweet crude is being offered to blenders, especially those that operate floating storages off Malaysia, and to players who sell refining feedstock into China, a Singapore-based Western crude trader said.

The Noor Islamic move was seen as a positive for relations between the United States and UAE, which recently announced a $3.48 billion deal for a U.S.-built missile defense system.

Yet Dubai, long a major trading partner with Iran, has benefited from tougher sanctions pushing more business its way. It has a sizeable Iranian expatriate population and hosts a fleet of traditional wooden dhows (boats) which transport goods across Gulf waters to Iranian ports every day.

Iran is the UAE's top destination for re-exports, or goods imported into the UAE and sold on to Iran. Figures released on Wednesday showed these re-exports rose by 51 percent in the first 10 months of 2011 to 36.3 billion dirhams ($10 billion).

(Additional reporting by Martina Fuchs in Abu Dhabi, Dinesh Nair in Dubai and Yaw Yan Chong in Singapore; Writing by Sitaraman Shankar and Reed Stevenson; Editing by Elizabeth Piper and David Holmes)

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