New Iran sanctions measure to "lock up" oil earnings: US official

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* Funds can be used only for permissible bilateral trade

* Provision to shackle Iran's oil revenues-Treasury's Cohen

By Roberta Rampton

WASHINGTON (Reuters) - The United States has aggressively ramped up its use of financial sanctions this year to pressure Iran to stop pursuing nuclear weapons, but a measure that takes effect in February could have the most dramatic impact yet, the Treasury Department's top sanctions official said on Thursday.

Starting February 6, U.S. law will prevent Iran from repatriating earnings it gets from its shrinking oil export trade, a powerful sanction that will "lock up" a substantial amount of Tehran's funds, said David Cohen, undersecretary for terrorism and financial intelligence at the U.S. Treasury Department.

"Iran's oil revenues will largely be shackled within a given country and only useable to purchase goods from that country," Cohen said in a speech to the Foundation for Defense of Democracies, a group that has advocated for tougher sanctions.

A year ago, the U.S. Congress passed a law requiring buyers of Iranian oil to make significant cuts to their oil purchases, or risk being cut off from the U.S. financial system.

The new measure, developed by Senator Robert Menendez, a New Jersey Democrat, and Mark Kirk, an Illinois Republican, was part of a second sanctions package passed by Congress in August.

Along with a European Union embargo on Iranian oil, the sanctions have cut Iran's oil exports by more than 50 percent, costing Iran up to $5 billion per month, and led to a plunge in Iran's currency, the rial, Cohen said.

The United States and European Union are hoping the economic pressure will force Iran to address international concerns about its nuclear program, which Tehran insists is for peaceful purposes.

"We are committed to increasing the financial pressure on Iran as long as necessary, and we will continue to look for innovative ways to make the Iranian regime bear the financial costs of its behavior," Cohen said.

LOCKS UP EARNINGS

The United States has so far granted sanctions waivers to importers for their oil dealings with Iran because the countries have substantially reduced their purchases.

A new round of the waivers, called "exceptions," are expected to be announced for India, South Korea, Turkey and others on Friday.

Starting in February, a foreign bank handling transactions related to Iranian oil sales must ensure the payments are held in an account within the importing country, and are used only for permissible trade between that country and Iran.

If banks transfer Iran's oil earnings beyond their borders, they will risk losing access to the U.S.

"law will prevent Iran from repatriating earnings it gets from its shrinking oil export trade, a powerful sanction that will "lock up" a substantial amount of Tehran's funds, said David Cohen, undersecretary for terrorism and financial intelligence at the U.S"banking system, Cohen explained.

"Virtually all countries that purchase oil from Iran run a significant trade deficit, meaning the value of their oil imports from Iran is greater than the value of their exports to Iran," Cohen said.

"As a result, this provision should lock up a substantial portion of Iran's earnings in each of these countries," he said, noting U.S. officials have been meeting with international buyers to explain the new law.

Japan, which counts on Iranian oil but has slashed its purchases in compliance with sanctions laws, has expressed concern about the new provision taking effect in February.

The U.S. Senate agreed to a third package of sanctions last week that would add similar restrictions on payments for Iran's natural gas exports, and makes clear that sales or transfers of precious metals to Iran are not permissible.

It is part of a defense bill that may be finalized by the Senate and House of Representatives by the end of the year, after which it would land on President Barack Obama's desk to be signed into law.

(Editing by Lisa Shumaker)