European governments have agreed in principle to ban imports of Iranian oil, EU diplomats said on Wednesday, dealing a blow to Tehran that crowns new Western sanctions months before an Iranian election.

The prospective embargo by the European Union, along with tough US financial measures signed into law by President Barack Obama on New Year's Eve, form a concerted Western campaign to hold back Iran's nuclear program.

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Iran says the program is strictly non-military, but Western countries say a November UN report shows it has sought to build an atomic bomb. Talks between Tehran and major powers broke down a year ago.

Diplomats said EU envoys held talks on Iran in the last days of December, and that any objections to an oil embargo had been dropped - notably from crisis-hit Greece which gets a third of its oil from Iran, relying on Tehran's lenient financing. Spain and Italy are also big buyers.

"A lot of progress has been made," one EU diplomat said, speaking on condition of anonymity. "The principle of an oil embargo is agreed. It is not being debated any more."

US State Department spokeswoman Victoria Nuland called the EU moves "the kinds of steps that we would like to see not just from our close allies and partners in places like Europe but from countries around the world".

"We do believe that this is consistent with tightening the noose on Iran economically," she said.

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A US Treasury official said Tehran's oil revenues could be choked off without disrupting global oil markets.

Treasury Secretary Timothy Geithner will travel to China and Japan next week to discuss US sanctions on Iran and the state of the global economy.

The embargo will force Tehran to find other buyers for oil. EU countries buy about 450,000 barrels per day (bpd) of Iran's 2.6 million bpd in exports, making the bloc collectively the second largest market for Iranian crude after China.

Prime Minister Mario Monti said Italy was ready to back an oil embargo as long as it was imposed gradually and deliveries to repay Tehran's debts to Italian energy firm ENI were exempted.

The news caused a spike rise in oil prices, with Brent crude peaking at nearly $114 a barrel in intraday trading, up nearly $2 from Tuesday's close.

Tehran insisted it would have no trouble: "We could very easily replace these customers," said S. M. Qamsari, International Director of the National Iranian Oil Co.

But the new US sanctions have already made it difficult for Iran to keep its customers, and could force it to offer steep discounts to countries willing to risk doing business with it, hurting its revenues.

Biggest trading partner China, driving a hard bargain, has cut its orders of Iranian oil by more than half this month.

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