India plans to set up a fund to back local insurers providing cover for refiners processing Iranian oil after companies warned they would be forced to halt imports from the sanctions-hit nation, the federal oil secretary said on Sunday.

Mangalore Refinery and Petrochemicals Ltd (MRPL) and Essar Oil have said they would halt imports from Iran because of insurance problems, Vivek Rae told reporters.

Europe and the United States last year introduced tough sanctions aimed at Iran's oil trade in a bid to force Tehran to the negotiating table over its nuclear programme.

Insurers rely on European reinsurance markets to hedge their risk. EU sanctions have blocked European reinsurers from any involvement in insuring shipments of Iranian oil.

India, the world's fourth biggest oil importer, has sought clarification from the European Union on insuring oil supplies from Iran as trade with Tehran gets tougher due to the sanctions, foreign minister Salman Khurshid said on Friday.

Rae said India's finance ministry is yet to take a final decision on setting up the reinsurance fund.

According to the proposal, local insurers and the Oil Industry Development Board, a unit of the federal oil ministry, would contribute money for the fund that would provide reinsurance for the state insurers, he said.

"What will be the size of this fund, how much we are required to contribute, whether it is enough to cover reinsurance - these are the details that insurance companies have to work out," Rae said.

He added supplies from Tehran could also be hit because in the next stage of sanctions refiners may be asked to certify that their exported products were not produced using Iranian oil.

India is Iran's second-largest buyer after China, taking around a quarter of its oil exports worth around $1 billion a month. India's refiners have already slashed imports from Iran as they joined other major Asian buyers in reducing purchases to secure waivers from the sanctions.

MRPL plans to lift 40 percent less oil under its annual deal with Iran in the fiscal year ending March 31, while Essar Oil aims for a 15 percent reduction. The two companies have a deal to buy 100,000 barrels per day of oil from Iran in 2012/13.

In the first 10 months of the current fiscal year, India reduced Iran crude imports by nearly 22 percent on the year, data from trade sources shows. – Reuters