TEHRAN: Iran says it has canceled a planned $500 million loan to Pakistan to build part of a pipeline to bring natural gas from Iran.

Deputy Oil Minister Ali Majedi says Iran has no obligation to finance the Pakistani side of the project and also doesn't have the money. Majedi’s comments were posted on the oil ministry's website, shana.ir, Saturday.

"Pakistani officials were told in recent talks that, given the sanctions, Iran is not able to finance construction of the pipeline (in Pakistan) and has no obligation to do so," he said.

He said Tehran will demand compensation if Islamabad fails to take Iranian gas by end of next year.

Under a valid contract, Pakistan is required to finish construction of the pipeline on its territory by the end of 2014.

"If a contractor is chosen today and pipeline construction begins today, it will take four years to complete it. Should Pakistan fail to take gas by the end of next year, Iran will demand compensation under the terms of the contract," he said.

Pakistan has welcomed an Iranian offer to approach third parties, including European companies, to finance the project.

The Iran-Pakistan pipeline is designed to help Pakistan overcome its mushrooming energy needs. Pakistanis experience frequent blackouts.

Iran has already invested over $2 billion to construct the Iranian side of the pipeline. But there are serious doubts about how Pakistan could finance the $2 billion needed to construct the pipeline, which also faces US opposition.