European nations ordered an immediate embargo on new crude oil contracts with Iran in an effort to force Tehran to start serious negotiations about its nuclear programme.
The ban was agreed by the European Union's 27 ambassadors and then adopted by a summit of member nations' foreign ministers in Brussels.
The embargo requires no new contracts be signed and that existing ones run only until July.
That will give refineries time to find other sources of crude oil.
Greece, which relies more heavily than others on Iranian oil, had hoped for longer respite. EU ministers agreed in principle to make up the costs Greece incurs as a result of the embargo.
The EU also froze some European assets held by Iran's central bank. In addition, trade in gold, diamonds and precious metals with the bank and Iranian public bodies will be prohibited.
The EU and US will now seek to persuade Asian countries to reduce purchases, which account for more than 60 per cent of Iranian exports.
The new sanctions provoked predictable responses.
A senior member of Iran's parliament said Iran would close the Strait of Hormuz - the choke point forseabourne oil exports through the Gulf -if new sanctions block its oil exports.
"If any disruption happens regarding the sale of Iranian oil, the Strait of Hormuz will definitely be closed," Mohammad Kossari, deputy head of parliament's foreign affairs and national security committee, told the semi-official Fars news agency.
Russia said the EU decision was counterproductive andit would continue to defend Tehran against further sanctions. "Unilateral sanctions do not help matters," Russian news agencies quoted Foreign Minister Sergei Lavrov as saying. Iran produces about three million barrels of crude oil daily and more than two million barrels are exported.
The British foreign secretary, William Hague, described the measures as unprecedented and said they demonstrate the EU's resolve to increase "the peaceful legitimate pressure on the Iranian government to enter into meaningful negotiations with the international community".
There is widespread international suspicion that Iranian claims to be developing a nuclear programme for purely peaceful purposes conceal an attempt to manufacture nuclear arms.
Tehran's warnings about the Strait, through which about 20 per cent of the world's oil is carried, have significantly heightened international tension.
The US, which has a naval base in Bahrain, has said it will take necessary action to keep the route open.
The US message was reinforced on Sunday when the aircraft carrier USS Abraham Lincoln passed through the waterway to the Gulf without incident. British and French officials confirmed that their countries had sent ships to accompany the carrier.
The embargo is likely to inflict considerable harm on Iran's economy and oil industry. The trade in crude oil accounts for 90 per cent of all Iranian export and for half of all government receipts.
Europe's importance as a destination for Iranian crude has declined, and only 18 per cent of the exports ended up in the EU last year, according to the US energy information agency. The growth of Asia's economies has made them an increasingly important market, China overtaking Europe to become Iran's biggest oil client.
The embargo will leave Iran little choice but to try to sell more to Asian buyers. After exhausting storage limits, Iran will have to sell at a discount.
"We do expect China to reduce the price as it essentially coaxes Iran to give a discount," said Amrita Sen, an analyst at Barclay's Capital.
US sanctions that came into effect on January 1, and target payments to the Iranian central bank, further hamper oil exports. Iran is already facing difficulties in receiving payments from India, and this week requested that half of future payments from India be made in Japanese Yen.
The embargo and the sanctions will also eat into the productivity of the Iranian oil sector, which has long failed to attract modern technologies and capital to modernise its infrastructure. As a result, production rates in the second largest Opec producer are declining.
"It is the Iranian oil industry that is going to face the underlying impact. We do expect a pretty severe impact," said Ms Sen.
Tehran's foreign ministry has dismissed the West's concerns about its nuclear intentions as "baseless and far from reality". But Western officials say Iran is lying and cite considerable evidence that its programme's primary objective is to produce weapons.
The EU foreign policy chief Catherine Ashton said yesterday the sanctions were intended to convince Iran it had to enter into the meaningful talks. World powers were still waiting for a reply to an offer of negotiations made three months ago, she said.
"The pressure of sanctions is designed to try to make sure that Iran takes seriously our request to come to the table and meet," she said.
Even if Iran does agree to enter negotiations, it will be required to show what the US secretary of state Hillary Clinton has called in recent days a "seriousness and sincerity of purpose".
The EU froze the assets of eight other companies, and imposed visa bans and assets freezes on three Iranians. They will not be identified until their names are published in the EU's official journal today.
The UAE has its own interest in events in the Strait, where it has a long-standing claim of sovereignty over the islands of Greater and Lesser Tunb, which Iran seized in 1971 and has refused to return despite the support of the GCC for the UAE's claim.
The BBC reports that a US investment adviser, Dennis Gartman, has reminded clients to keep an eye on the dispute over the islands. "They were nothing more at one time than mere outcroppings …[but] now for Iranian army and navy forces these islands are staging points for potential military mischief in the Gulf," he said.
Iran remains defiant yesterday. The Financial Times of London quoted Mehdi Goudarzi, the central bank's director general for international affairs, as saying Iran enjoyed "the highest" levels of hard currency and gold reserves and could deal with any crisis.
* Additional reporting by the Associated Press