Turkey and other US allies have been allowing Iranian banks with suspected links to Tehran's nuclear program to do business within their borders, frustrating Western countries trying to put a financial squeeze on the Islamic Republic, Reuters has learned.

An examination of classified reports and interviews with Western diplomats, government and intelligence officials underscore that Turkey and others have resisted international pressure to make it harder for Iran to finance its uranium enrichment program.

"Turkey's blossoming financial-economic relationship with Iran provides the Islamic country with a gateway to the entire European financial system," according to an intelligence report on Turkey and Iran provided to Reuters by a diplomat.

"The fact that Turkey is allowing itself to be used as a conduit for Iranian activity via Turkish banks and the Turkish lira is making it possible for Iranian funds in Turkish guise to make their way into Europe."

Turkey, a Nato member that looks to join the European Union, has enjoyed growing economic and financial relations with neighboring Iran.

Trade between the two nations reached $10 billion in 2008 and could triple in five years, Turkish Prime Minister Tayyip Erdogan told a group of businessmen he met together with Iran's first vice president Mohammad Reza Rahimi last week.

Much of that trade is legitimate, but if Turkey becomes a virtual safe haven for Iranian banking activities, it will be easier for Tehran to dodge sanctions, according to diplomats.

Ankara's move closer to its eastern neighbor, which is a major energy supplier to Turkey, comes at a time of growing international isolation for Tehran. Iran has been stepping up its uranium enrichment program, which the West fears is aimed at building a nuclear bomb and Tehran says is purely peaceful.

Even so, persuading Turkey to overlook its own economic interests and restrict the activities of the more than a dozen Iranian banks the United States and EU have sanctioned won't be easy.

Ankara is obligated to implement just the UN measures, and only Turkish banks with business in the United States could face US penalties for dealing with Iranian companies blacklisted by Washington.

Earlier this year in the US, Britain and others pushed the UN to blacklist Iran's central bank, the Export Development Bank of Iran, Bank Mellat and other Iranian financial institutions. But they met with fierce resistance from China, which has close business ties with and imports much of its crude oil from Iran.

Those banks, US and EU officials argued, have turned to Europe, the Middle East, Asia and Africa to finance Iran's illicit procurement activities for its nuclear and missile programs, sometimes covering up the fact that they were working on behalf of other blacklisted Iranian banks.

In the end, the UN Security Council only added one bank - a subsidiary of Mellat called First East Export Bank - to its blacklist.

Although Mellat itself avoided any sanctions, resolution 1929 noted that over the last seven years it has "facilitated hundreds of millions of dollars in transactions for Iranian nuclear, missile and defense entities."

The US and EU, for their part, slapped Mellat, Iran's second largest bank, with sanctions on their own. But the bank continues to operate branches in three Turkish cities - Istanbul, Ankara and Izmir - without any visible interference from the Turkish government.

This has irked the United States and EU, which have grown frustrated with what they see as Turkey's conciliatory approach to Iran - and simultaneous cooling of relations with Tehran's arch enemy Israel, a longtime Turkish ally.

Turkey and fellow rotating Security Council member Brazil became the first two nations to vote against a UN sanctions resolution on Iran in June. In the past, the few dissenting members have abstained.

The two nations attributed their move to the dismissive response by the US and EU to a Turkish-Brazilian plan to revive a stalled nuclear-fuel-swap deal with Iran. They had  hoped the proposal would help resolve the standoff with Iran, eliminating the need for new sanctions - a view Washington, London and Paris did not share.

Turkey has said it does not want any atomic weapons in the region - which could apply to Israel (which has a widely known but officially unacknowledged nuclear weapons capability) as well as Tehran. But it is also worried that a more confrontational approach to Iran's nuclear program could lead to another war in the Middle East.

Turkey's finance and economy ministries as well as individual banks refused to comment for this story. But Turkish officials sometimes complain privately that the nation gets beaten up by Western media because of Ankara's criticism of Israel's stance toward the Palestinians as well as its position on Iran's nuclear program.

Western officials say they are only trying to encourage Ankara, a candidate for European Union entry, to assume a more cautious approach toward Iran.

Apart from First East Export Bank, the only Iranian bank blacklisted by the four U.N. Security Council sanctions resolutions passed during the past four years is Bank Sepah.

But UN warnings about two other banks, Bank Melli and Bank Saderat, have also led to their de facto blacklisting, while the United States and EU have identified many more Iranian banks to be shunned.

The US Treasury Department alone has blacklisted 17 Iranian banks to date, making it illegal for any bank that does business in the United States to have contact with those institutions. Individuals and firms sanctioned by the Security Council face global travel bans and asset freezes.-Reuters