The World Bank's investment arm has approved its first investment in Iran since 1974.

The World Bank's International Finance Corporation (IFC), said it would invest $2m to take a 20% stake in an Iranian joint-venture leasing company, and lend it a further $3m.

The loan could widen the rift between the World Bank and the US, its biggest stakeholder, over future funding.

"Through this small, catalytic investment in a leasing company, IFC will be helping to provide an alternate source of term finance for small and medium enterprise which is expected to boost job creation and ultimately help expand a sustainable private sector in Iran," Peter Woicke, executive vice president of the IFC, said in a statement.

The IFC last lent money to Iran five years before Iran's 1979 revolution.

US opposition

There was strong criticism of the World Bank by the US Congress when it made two loans totalling $232m for Iranian health and sewerage projects in May 2000.

The US voted against those loans at World Bank board meeting but has not revealed how it voted on the latest IFC funding.

Congress decides how much the US Treasury contributes to the World Bank and IFC.

The World Bank is currently considering a further three projects in Iran worth $280m.

Financial sector

The new lending will establish Karafarin Leasing with Iran's Karafarin Bank and Natexis Banque Populaires, one of the largest banks in France.

The company will lease medical, office, manufacturing, transport and construction equipment to small and medium size business, the IFC said.

Karafarin Leasing will give small and medium enterprises an alternative source of funds apart from family sources, the IFC added.

Bank Karafarin became the first private bank to be licensed to operate in Iran since the Islamic revolution

The majority of Iran's 13 banks are state-owned.