By Arshad Mohammed and David Lawder
WASHINGTON (Reuters) - The U.S. Treasury Department plans to designate Iran as an area of "primary money laundering concern" on Monday, a U.S. official said, a move that will prompt new steps to isolate Tehran from the international financial system.
The moves are expected to be coordinated with Canada and Britain, where the finance ministry ordered all UK financial institutions to stop doing business with their Iranian counterparts and the Iranian central bank.
The United States is not expected to add Iran's central bank, Bank Markazi, to its formal sanctions list, which could effectively cut it off from the international financial system, cause oil prices to spike higher and hurt U.S. economic recovery
But a U.S. official said the declaration is aimed at signaling to foreign governments and financial institutions that they must wind down their ties to Iran, with tougher sanctions to come down the road.
U.S. Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton will outline the new steps against Iran at 4:30 p.m. EST (2130 GMT) at the State Department in Washington, the Treasury Department said.
Under Section 311 of the U.S. Patriot Act, such a designation allows the United States to take a range of "special measures" against a jurisdiction as a whole, an institution, a class of transactions or a type of account.
The decision, first reported by ABC News and the Wall Street Journal, follows a November 8 report by the U.N. nuclear watchdog that presented intelligence suggesting Iran had worked on designing an atomic bomb and may still be secretly carrying out related research.
That report, calls by U.S. lawmakers to sanction Iran's central bank and media speculation of a possible Israeli strike against Iran's nuclear sites have all pushed the Obama administration to look for tougher sanctions against Tehran.
The Treasury Department is expected to impose formal sanctions on dozens of other entities newly revealed to be supporting Iran's nuclear program, including those involved in the development of centrifuges and a reactor in Arak said to be aimed at producing plutonium.
The Obama administration suspects that Iran is pursuing a nuclear weapons capability under cover of its civilian atomic energy program. Tehran denies this, saying it has no interest in nuclear arms and its atomic program is purely peaceful.
The United States is also expected to unveil sanctions against Iran's petrochemical sector on Monday, sources familiar with the matter said on Friday, and European nations are expected to follow suit.
Senator Mark Kirk, a Republican, welcomed the administration's move, but called on Congress to pass his proposal to sanction financial institutions that do business with Iran's central bank.
"The Central Bank of Iran is a terrorist bank actively engaged in illicit activities and I welcome the Administration's decision to put the world on notice. Now we need to move forward with bipartisan legislation to collapse this terrorist bank and stop Iran's pursuit of nuclear weapons before it's too late," Kirk said in a statement emailed to Reuters.
Britain's sanctions appeared to go further, ordering all but humanitarian transactions and personal remittances to stop.
British Finance Minister George Osborne said Iran's actions posed a serious threat to national security and the action was being taken in coordination with other countries.
"We believe the Iranian regime's actions pose a significant threat to the UK's national security and the international community. Today's announcement is a further step to preventing the Iranian regime from acquiring nuclear weapons," Osborne said.
The move will prohibit UK credit and financial institutions from entering into transactions or business relationships with banks incorporated in Iran and their branches and subsidiaries.
Firms with existing transactions and business relationships with Iranian banks can apply for a license to do business, but these only cover humanitarian activities, personal remittances and provision of some insurance and reinsurance.
RELUCTANCE TO DISRUPT OIL MARKETS
According to the U.S. Treasury website, the United States has previously designated three jurisdictions as of "primary money laundering concern" -- Myanmar, Nauru and Ukraine.
When applied to a specific institution, such a designation can have devastating consequences. In 2005, the United States designated Macau-based bank Banco Delta Asia as a primary money laundering concern because of its dealings with North Korea.
When the United States later allowed BDA to return more than $20 million in frozen assets to North Korea, it had great difficulty finding a bank to carry out the transfer because most feared losing access to the U.S. financial sector.
The range of "special measures" permitted under U.S. law appears to give the Obama administration fairly wide latitude on how to tailor any restrictions.
According to the 2003 designation of Myanmar, which the U.S. government refers to by its colonial name Burma, such steps can allow the Treasury to obtain more information about the designated jurisdiction, better monitor transactions with it or bar U.S. financial institutions from dealing with it.
U.S. officials say there has been a debate within the Obama administration about whether to formally sanction the Iranian central bank, which many importers of Iranian crude oil use to clear their transactions.
(Additional reporting by Susan Cornwell in Washington and Fiona Shaikh in London; Editing by Jackie Frank)