TOKYO: Japan, one of America's staunchest allies in the war on terrorism, has agreed a $2 billion deal to develop an oilfield with Iran, the state once described by President George Bush as part of an "axis of evil".

Under the agreement, signed on Wednesday in Tehran, a Japanese consortium will develop the Azadegan oilfield which, with estimated reserves of 26 billion barrels, is thought to be one of the biggest in the Middle East.

Officials in Washington could barely conceal their irritation. "Our policy, with respect to Iran, has been to oppose petroleum investment there," said the US state department spokesman Richard Boucher. "We remain deeply concerned about deals such as this, and disappointed that these things might go forward."

It is thought that the Japanese prime minister, Junichiro Koizumi, calculated Washington would not take retaliatory action against the Japanese consortium only weeks after Tokyo made its biggest gesture yet of support for the US-led war in Iraq by sending ground troops to the Gulf.

The oilfield could start pumping oil in less than four years, the Japanese trade and industry ministry said. The deal was the culmination of more than three years of talks between Tokyo and Tehran.

The prospects for an agreement suffered last year when the US put pressure on Japan not to do business with Iran, fearing the investment would be spent on Tehran's nuclear programme. -Dawn/The Guardian News Service.