Japan has signed an estimated $2bn deal to exploit Iran's Azadegan oil field, one of the largest in the Middle East.
Japan wants to diversify its energy sources
Japan will have full development rights to the southern part of Azadegan, which has estimated reserves of 26bn barrels.
Japan depends on imports for almost all its energy needs and wants to diversify its supplies amid concerns about existing oil sources in the Gulf.
The agreement, under discussion for three years, had been delayed by US concerns about Iran's nuclear plans.
The US State Department spokesman, Richard Boucher, said he was "disappointed" that the deal had been completed.
The project is one of the largest Iran has signed with a foreign country since the Islamic Revolution of 1979.
The Japanese partner will have a 75% interest, and Iran the remaining 25%.
Getting on target
Japan has been keen to reach agreement on developing Azadegan to meet its long-term energy needs, and reduce its reliance on Saudi Arabia and the United Arab Emirates, which accounted for nearly two-thirds of Japan's oil imports in 2001.
The talks appeared to stall last July when Washington, which dubbed Iran part of an "Axis of Evil" for its nuclear programme, criticised Tokyo for being ready to deal with Tehran.
The negotiations reportedly resumed after Iran agreed to inspections of its nuclear facilities late last year.
"Japan is the world's second largest oil consumer and Iran is the second largest oil producer in OPEC, so we are actually two sides of the same coin," said Iranian Oil Minister Bijan Zanganeh.
A Japanese government-backed consortium hopes to begin production at Azadegan in 2006, reports say.
JAPAN'S ENERGY DILEMMA
Half of Japan's energy comes from oil
88% of oil imported from Middle East, mainly from Saudi Arabia and UAE
Japan pays $1 more per barrel than Europe or US, because of transport costs
Azadegan is expected to pump 150,000 barrels per day by mid-2008, and reach 260,000 bpd by early 2012, said Iran's upstream development chief Mehdi Hosseini.
Experts say the deal will push Iran closer to its production capacity goal of 5m bpd from the current 4.2 bpd.
The news of the deal was greeted with concern by the US Government.
"Our policy has been, with respect to Iran, to oppose petroleum investment there," Mr Boucher was quoted as saying by Japan's Kyodo news agency.
"We remain deeply concerned about deals such as this," he said.