WASHINGTON (The Guardian) - An escalating crackdown by the U.S. on foreign companies and banks doing business with Iran is provoking opposition in Britain and Europe, where diplomats say the action could lead to a trade war.

Congress wants all international companies to end their investment in Iran and is pushing through a bill that would penalize companies which fail to do so. The British, along with other European governments, see the U.S. approach as draconian and are lobbying against it. The American move reflects frustration at the failure, so far, of western diplomacy to persuade Iran to stop its uranium enrichment. As a member of the nuclear Non-Proliferation Treaty, Iran has right to do enrichment for civilian purposes. A senior British banking source said on Thursday there was a great deal of annoyance in the City with the U.S. approach. The two British banks most frequently mentioned in Washington in relation to Iran are HSBC and Standard Chartered. The source said both banks have scaled down their operations in Iran and maintain a modest presence in Tehran. But much of their former business, which consisted principally of managing payments between companies, has been picked up by German and French banks whose governments have resisted pressure from Washington, the source said. The State Department has been pressing for disengagement for months. But the move is being given added impetus by the Iran counter-proliferation bill going through Congress that would penalize the American interests of companies that continue to have a presence in Iran. Tom Lantos, chairman of the House foreign affairs committee, said: ""Our goal must be zero foreign investment."" The Security Council has imposed limited sanctions on Iran, mainly economic and travel bans, and a third round of sanctions is being discussed. The White House sees it as inconsistent for European countries to support sanctions but to allow companies to continue trading. Britain says it has no legal basis to order the banks to close their Iranian operations. European diplomats say the U.S. is aiming at the wrong targets and should focus on Arab and Far East companies that have a greater exposure to the Iranian market. Any penalties imposed by the U.S. would be in breach of World Trade Organization rules, they argue. A senior U.S. official said there have been discussions between Stuart Levey, the under-secretary of state at the treasury, and the British government, though he acknowledged that the involvement of British banks and companies was not as deep as some on the continent. He said the EU had £11bn in export credits to Iran in 2005, the latest figure available. ""So we have been in discussions with many of the leading governments - Germany, France, Italy, Spain - the four largest countries with exposure to export credits. This is really quite inconsistent with where we are going with UN sanctions,"" he said. ""We have had two sanctions resolutions: so why would you be promoting trade with Iran?