NEW DELHI - India has resolved a payments dispute with Iran over their multi-billion dollar oil business, an oil ministry source said, with New Delhi certifying each deal to try to ensure funds do not go to Iran's nuclear programme.

With imports of 400,000 barrels per day (bpd) -- 12 percent of daily needs -- at stake, India has softened its stance and allowed its largest lender State Bank of India (SBI) to deal with the U.S. sanction-hit European-Iranian Trade Bank AG (EIH).

The Reserve Bank of India (RBI) said in December payments to Iran could no longer be settled using a clearing system run by regional central banks, winning praise from Washington which said the move would cut funds it claims go to Iran's nuclear projects.

The new mechanism is largely along lines suggested by Iran in January.

But instead of Indian companies opening an account with Tehran-owned EIH Bank in Hamburg, it will see the SBI organising the payments in euros.

The source said the Indian government will certify every transaction as a bona fide payment towards import of oil from Iran and vouch that the money is not being used by Tehran to boost its nuclear programme.

The U.S. Treasury Department in September sanctioned EIH Bank for facilitating billions of dollars of transactions with Iranian banks that the United States and European Union have blacklisted for aiding Iran's nuclear or missile programs.

"SBI has got (assurance) from the highest levels of the government to deal with EIH. There is a backlog of around $2 billion in payments," the source said, adding SBI had been asked to start using the mechanism immediately.

Four refiners -- Mangalore Refinery and Petrochemicals Ltd, Essar Oil, Hindustan Petroleum, and Indian Oil Corp-- import crude from Iran.

"We have not yet heard it officially but if the issue is resolved then we will renew our term contract with Iran," said U.K. Basu, managing director of MRPL, Iran's biggest Indian client that imports about 150,000 bpd of crude.

B. Mukherjee, head of finance at HPCL, said: "I'm sure we shall be able to renew the term (annual) deal seamlessly."

HPCL imports about 60,000 bpd of crude from Iran.

The annual oil business between India and Iran runs from April to March. Iran had not stopped shipments during the dispute.