TEHRAN (Reuters) - A team of U.N. inspectors arrived in Tehran on Monday for talks on Iran's disputed nuclear program, a day after the Islamic Republic ordered a halt to its oil sales to British and French companies in apparent retaliation for tightening EU sanctions.
The European Union enraged Tehran last month when it decided to impose a boycott on its oil from July 1. Iran, the world's fifth-largest oil exporter, responded by threatening to close the Strait of Hormuz, the main Gulf oil shipping lane.
On Sunday, its oil ministry went a step further, announcing Iran has now stopped selling oil to French and British companies, a move which will however have little or no impact on supplies reaching France or Britain.
"Exporting crude to British and French companies has been stopped ... we will sell our oil to new customers," spokesman Alireza Nikzad was quoted as saying on the ministry website.
Iran, which denies Western allegations that it is seeking to make nuclear weapons, has ramped up its rhetoric in recent weeks while also expressing willingness to resume negotiations on its nuclear program.
The five-member team from the U.N. International Atomic Energy Agency (IAEA) will hold two days of talks in Iran, but Western diplomats have played down any hopes of a major breakthrough.
"I'm still pessimistic that Iran will demonstrate the substantive cooperation necessary," one envoy said in Vienna.
Yet the outcome of this week's discussions is important and will be watched closely because it could either intensify the standoff or offer scope to reduce tensions.
The European Commission says the bloc would not be short of oil if Iran stopped crude exports as it has enough stock to meet its needs for around 120 days.
Industry sources said European oil buyers were already making big cuts in purchases from Iran months in advance of EU sanctions.
French and Anglo/Dutch oil majors Total and Shell have been big buyers of Iranian crude but Total had already stopped buying from Iran and traders said last week that Shell had scaled back sharply.
Shell, which has declined comment on its trade with Iran, was one of the biggest consumers of Iranian crude globally, taking about 100,000 barrels daily into Europe and about the same amount to its Japanese subsidiary, Showa Shell.
Latest EU data, for the third quarter of 2011, shows that oil sales into Britain fell to zero and France imported 75,000 bpd, accounting for just 6 percent of its crude oil imports. Debt-ridden Greece is most exposed to Iranian crude disruption among European countries.
Iran says its nuclear program is entirely peaceful but its refusal to curb uranium enrichment, which can have both military and civilian purposes, has raised concerns.
Western powers have not ruled out using force against Iran, and there has been an intense public discussion in Israel about whether it should attack Iran to stop it making a nuclear bomb.
The top U.S. military officer said on Sunday that a military strike would be premature as it was not clear that Tehran would use its nuclear capabilities to build an atomic bomb.
"I believe it is unclear (that Iran would assemble a bomb) and on that basis, I think it would be premature to exclusively decide that the time for a military option was upon us," said General Martin Dempsey, chairman of the U.S. military's Joint Chiefs of Staff.
He said he believed the Iranian government was a "rational actor."
The West has expressed some optimism over the prospect of new talks with Tehran, particularly after it sent a letter to EU foreign policy chief Catherine Ashton last week promising to bring "new initiatives" to the table.
"In these negotiations, we are looking for a way out of Iran's current nuclear issue so that both sides win," Iranian TV quoted Foreign Minister Ali Akbar Salehi as saying on Sunday.
Oil is a major part of Iran's export revenues and an important lifeline for its increasingly isolated economy. It has little refining capacity and has to import about 40 percent of its gasoline needs for domestic consumption.
Tighter sanctions, combined with high inflation, have squeezed the ability of working-class Iranians to feed themselves and their families, and this uncertainty forms the backdrop to a parliamentary vote on March 2.
"Everything's become so expensive in the past few weeks," said Marjan Hamidi, an Iranian shopper in Tehran, "But my husband's income stays the same. How am I going to live like this?"