South Korea said it would penalise a key Iranian bank and put all financial transactions with Tehran under strict government supervision as part of sanctions over its nuclear programme.

Foreign ministry spokesman Kim Young-Sun said Wednesday the government would impose a "heavy penalty" on the Seoul branch of Bank Mellat, which allegedly facilitated hundreds of millions of dollars in transactions for Iranian nuclear, missile and defence entities.

Kim did not elaborate but Yonhap news agency said the bank would likely face a two-month suspension.

The decision came despite the fact that Iran is South Korea's biggest trading partner in the Middle East and the source of 10 percent of its oil imports.

The United States hailed the sanctions move as increasing pressure on Tehran to return to the negotiating table to address concerns about its nuclear aims.

Measures include blacklisting 24 individuals and 102 Iranian entities, including 14 other banks, as well as the strengthening of inspection of cargoes related to Iran.

There are also restrictions on new investment in Iran's oil and gas industry, but no ban on oil imports.

Transactions with Iranian entities which are not subject to sanctions will require approval from Seoul should the amount involved be more than 40,000 euros (51,056 dollars).

South Korea must walk a fine line between its trade relationship with Iran and its key ally the United States -- which has been leading the sanctions drive against Tehran over its suspected nuclear weapons programme.

The United States stations 28,500 troops in the South to protect it from North Korea. It strongly supported the South in the crisis following the sinking of one of Seoul's warships, allegedly by a North Korean submarine.

Washington has been canvassing international support for its drive to punish Iran after adopting its own sanctions to supplement United Nations measures.

Robert Einhorn, a US State Department official overseeing sanctions on North Korea and Iran, visited South Korea in early August to seek cooperation.

The Seoul sanctions send "a very strong signal to Iran that not only do we continue to have concerns about the nature of its nuclear activities, but we're taking aggressive action to further isolate Iran," US State Department spokesman Philip Crowley said.

Bank Mellat is one of Iran's biggest lenders and its Seoul branch is its only operation outside the Middle East and Europe.

A suspension of its business would likely affect more than 2,000 South Korean companies involved in trade with Iran, most of which is settled through the local branch office.

Iran's trade with South Korea surged more than 50 percent year-on-year to 7.4 billion dollars in the first seven months of this year, mainly due to increased Iranian oil exports.

Iran says that its nuclear programme is aimed at the peaceful generation of electricity. But the European Union, Canada, Australia and Japan have joined the United States in announcing punitive measures.

burs-pst/gk