By Arshad Mohammed and Susan Cornwell
WASHINGTON (Reuters) - The Senate unanimously approved tougher sanctions against Iran on Thursday, voting to penalize foreign financial institutions that do business with Iran's central bank, the main conduit for its oil revenues.
The Senate acted despite warnings from Obama administration officials who said threatening U.S. allies might not be the best way to get their cooperation in action against Iran.
Administration officials said they were indeed looking to sanction Iran's central bank, but in a calibrated manner, to avoid roiling oil markets or antagonizing allies.
The United States already bars its own banks from dealing with the Iranian central bank, so U.S. sanctions would operate by dissuading other foreign banks from doing so by threatening to cut them off from the U.S. financial system.
The United States and its Western allies have supported multiple rounds of sanctions on Iran, seeking to persuade it to curtail its nuclear work. Washington suspects Tehran of using its civilian nuclear program to develop an atomic bomb, although Iran says its program is solely to produce electricity.
The Senate voted 100-0 for an amendment sponsored by Senator Robert Menendez, a Democrat, and Senator Mark Kirk, a Republican, that would allow the U.S. president to sanction foreign banks found to have carried out a "significant financial transaction with the Central Bank of Iran."
"We seek to break the stable financial intermediary in between Iranian oil contracts and the outside world, so that it will just be easier to buy oil from elsewhere," Kirk said in debate this week.
The sanctions were approved as an amendment to a huge defense bill that passed later on Thursday in the Senate [ID:nN1E7B01V8]. Similar provisions have passed a House of Representatives committee, increasing the likelihood that some version will be sent to Obama for his signature into law -- or possible veto.
On November 21, the United States, Britain and Canada announced new sanctions on Iran's energy and financial sectors, but the Obama administration stopped short of targeting Iran's central bank, a step that U.S. officials said could send oil prices skyrocketing and jeopardized global economic recovery.
"The Obama administration strongly supports increasing the pressure on Iran, and that includes properly designed and targeted sanctions against the central bank of Iran, appropriately timed as part of a carefully phased and sustainable policy toward bringing about Iranian compliance with its obligations," U.S. Undersecretary of State Wendy Sherman told the Senate Foreign Relations Committee earlier on Thursday, several hours before the Senate vote.
WORLD OIL MARKETS
The Senate amendment provides a six-month grace period before sanctions would kick in for petroleum transactions with Iran's Central Bank, a move that appeared designed to give world oil markets time to adjust.
It includes a "waiver" letting the president suspend the sanctions if he deems it vital to U.S. national security.
"Our judgment is that the best course to pursue at this time is not to apply a mechanism that puts at risk the largest financial institutions, the central banks, of our closest allies," Undersecretary of the Treasury David Cohen told the Senate Foreign Relations Committee.
Sherman and Cohen drew a rebuke from Menendez, who argued he had agreed to make changes in the amendment to suit the Obama administration only to find that it still rejected the legislation.
"I am extremely disappointed," Menendez said. "At your request, we engaged in an effort to come to a bipartisan agreement that I think is fair and balanced and now you come here and vitiate that very agreement."
"You should have said we want no amendment, not that you don't care for that amendment," he added.
The Obama administration's chief concerns appear to be that the amendment could be a blunt instrument that might send oil prices higher and undercut support for sanctions among U.S. allies, whose backing has been vital to pass four U.N. Security Council sanctions resolutions against Iran.
While the Obama administration steps carefully, some countries in Europe are seeking to push forward a Europe-wide boycott of Iranian crude imports. EU foreign ministers in Brussels failed on Thursday to move forward with a plan backed by France and Britain to ban shipments, but agreed to examine expanding sanctions.
Tightening financial sanctions have already complicated Iran's oil trade. Last December, India's central bank scrapped a clearing house system with Iran, forcing refiners to scramble to arrange other means of payment in order to keep shipments flowing.
It is unclear whether further sanctions on financial dealings would affect shipments to countries like China, Iran's biggest buyer.
(Editing by Peter Cooney)