The Italian energy group ENI has signed a $1bn contract with the Iranian Government to develop an oilfield in south-western Iran.

Correspondents say the deal will be a test of President George Bush's resolve in implementing US legislation on economic sanctions against Iran.

Under the law, Washington has the power to punish any non-American companies investing more than $20m in Iran's energy sector.

However, the Clinton administration decided not to take action against several European firms which have become among Iran's biggest investors.

The contract was signed in Tehran by the Iranian Oil Minister, Bijan Namdar-Zanganeh, and the chief executive of ENI, Vittorio Mincato.

Iranian officials say the joint project will enable capacity at the Darkhowin oilfield in Khuzestan province to increase substantially in the next few years.

From the newsroom of the BBC World Service