By Timothy Gardner and Arshad Mohammed
WASHINGTON (Reuters) - The United States gave China a six-month reprieve from Iran financial sanctions on Thursday, avoiding a diplomatic spat with a country whose support it needs to try to quell violence in Syria and rein in Tehran's nuclear ambitions.
With Thursday's decision to grant exceptions to China, which buys up to a fifth of Iran's oil exports, and Singapore, which buys Iranian fuel oil, the Obama administration has now spared all 20 of Iran's major oil buyers from its unilateral sanctions.
The sanctions themselves are designed to pressure Iran to curb its nuclear program, which the West believes aims to develop nuclear weapons but which Tehran says is for peaceful purposes such as generating electricity and medical isotopes.
U.S. Secretary of State Hillary Clinton said both China and Singapore earned the reprieve by cutting imports of Iranian crude and argued the reductions by all 20 countries showed that Iran was paying a high price for its nuclear program.
"Their cumulative actions are a clear demonstration to Iran's government that Iran's continued violation of its international nuclear obligations carries an enormous economic cost," Clinton said in a release.
Earlier this month the administration granted exceptions to India and six other economies. Japan and 10 European Union countries got exceptions in March.
The sanctions seek to pressure Iran by choking off its oil revenues, the life blood of the Iranian economy.
Iran's exports have already fallen about 1 million barrels per day, worth about $630 million a week, on the threat of U.S. and EU sanctions. But the impact on oil markets has been muted by a surge in production from the world's largest exporter, Saudi Arabia, and signs of economic troubles in Europe and China.
Geng Shuang, a spokesman at China's embassy in Washington, said his country "will continue working with parties concerned to find a peaceful solution of the issue through dialogue and negotiation."
Under the law President Barack Obama signed late last year, the administration can cut foreign banks from access to the U.S. financial system if they perform oil transactions with Iran's central bank. The law also allows Obama to grant 180-day exceptions to any country that has "significantly reduced" purchases of Iranian oil.
The administration has not specified the levels each country must cut, but officials have said Japan had trimmed imports by about 15 to 22 percent.
China's imports from Iran fell about 25 percent in the first months of the year on an unrelated pricing dispute with Tehran. The imports bounced back in May and are expected to do the same in June and July. With the rebound, the administration risks criticism from sanctions supporters on Capitol Hill.
ACTIONS LOUDER THAN WORDS
"The Administration likes to pat itself on the back for supposedly being strong on Iran sanctions," said Republican Ileana Ros-Lehtinen, the chairman of the House Foreign Affairs Committee.
"But actions speak louder than words, and today the Administration has granted a free pass to Iran's biggest enabler, China," she said.
The administration, however, is probably "prepared to take that risk because it would want to avoid a major diplomatic spat with Beijing" over the sanctions, said Mark Dubowitz, the head of the non-profit group Foundation for Defense of Democracies, which advocates tough sanctions on Iran.
Tension over sanctions had driven oil prices higher early this year, but the impact has faded.
"The oil market has already priced this in as the assumption was that China would be able to continue trading with Iran regardless," said Societe Generale's global head of oil research, Michael Wittner.
Some Iranian ships have turned off tracking devices, according to oil market sources, leaving open the question of whether China and other countries are importing crude that has gone undetected.
"I think we basically witnessed a game of chicken between the U.S. and China and the Obama administration flinched first," a Senate Republican aide said, speaking on background.
To renew its exception six months from now China will have to prove without doubt it has cut purchases from Iran, said Democratic Senator Robert Menendez, who helped craft the sanctions law. "We will expect to see additional significant reductions by China and other nations."
(Additional reporting by Roberta Rampton and David Sheppard in New York; Editing by Sandra Maler, Leslie Gevirtz, Sofina Mirza-Reid and Bob Burgdorfer)