LONDON (REUTERS) - Britain has blocked efforts by oil major Royal Dutch Shell to settle a US$2.3 billion (S$3 billion) debt it owes Iran by paying in kind with grains or pharmaceuticals, industry sources said.

Shell has been trying for months to find a way to work around international sanctions that prevent it paying in currency for crude it bought from the National Iranian Oil Company before a European Union embargo on Iran that started last July.

The sources said the British government was reluctant to provide relief for the Iranian economy when Western powers are using sanctions to apply financial pressure on Teheran to dismantle its nuclear programme.

"The view is that doesn't make sense to smooth the way for a payment that helps Iran when government is trying to press Iran to negotiate," said an industry source.

A government spokesman declined comment on the Shell case but said: "The government fully backs the tough regime of EU sanctions that have been put in place against Iran."

Talks earlier this month between Iran and six world powers including Britain failed to make progress in resolving a decade-old dispute around Iran's nuclear progress. Another round of negotiations has been scheduled for May 21.

The industry sources said Shell in February explored with the British government the possibility of asking British pharmaceuticals maker GSK to deliver medicines to Iran in a payment-in-kind deal known as an offset agreement.

GSK said it had not been approached or held any discussions on the matter. Shell declined comment.

In October, the Anglo-Dutch oil company sought permission for an offset agreement that would have seen U.S. agricultural trader Cargill deliver grain to Iran.

Following publication by Reuters, Dutch foreign minister Frans Timmermans in a letter to parliament acknowledged the proposal, saying: "As in all sanctions regimes there are some carefully defined exceptions applicable for which in certain cases an exemption can be granted by national governments." Meetings were held with Cargill but, said the industry sources, the proposal was turned down by the British government.

Cargill and Shell both declined comment at the time.