BRUSSELS, Belgium (AP) _ The European Union warned the United States against meddling in a $2 billion French business deal with Iran, saying any trade sanctions would damage transatlantic relations.

The group's trade chief, Sir Leon Brittan, said Tuesday that French oil giant Total was ``fully entitled'' to sign an agreement to develop a natural gas field in Iran despite U.S. objections.

Washington, which accuses Iran of sponsoring terrorism, has said it will investigate the deal under the U.S. Iran-Libya Sanctions Act. The measure allows penalties against companies investing more than $20 million in Iran, or $40 million in Libya.

Secretary of State Madeleine Albright, calling Iran a rogue state that supports terrorism, denounced the EU warning.

``It is of great concern to us that our friends and allies don't get it,'' she said in response to questions after addressing the private Council on Foreign Relations in New York. ``It is, indeed, frustrating.''

Brittan warned that any interference by Washington would set ``in motion a chain of events which could seriously damage the wider relationship.''

He did not elaborate but the 15-nation EU has prepared retaliatory measures in case it has to react to such sanctions.

``Such legislation is contrary to international law,'' said Brittan. ``It is also counter-productive in political terms since it creates tension between Europe and the United States, which makes it more difficult to work together to achieve shared political objectives in Iran.''

It was not the first time the United States and the EU have clashed over Iran.

The union has long ignored American calls to isolate Iran. Instead, it has had a ``critical dialogue'' with that nation since 1992. The policy allows for high-level meetings and economic ties while simultaneously urging Tehran to improve its human rights record.

The EU suspended the dialogue program, though, after Iran refused to let the German and Danish ambassadors return to Tehran this spring. All EU diplomats were recalled after a German court concluded Iran's leaders had ordered the killings of four dissidents in Berlin.

The United States criticized the EU nations for even considering sending their envoys back to Tehran.

Despite the diplomatic standoff, economic initiatives in Iran's energy sector have continued.

And even if the French government stressed Total's controversial contract was a private initiative, officials let it be known they backed the deal.

``French companies freely decide on their investments, and that is the case of Total,'' said French Prime Lionel Jospin. But, he added, ``personally, I rejoice.''

Even before the Total deal, EU and American officials had been negotiating to try to end by Oct. 15 their differences over the Iran-Libya sanctions law and the Helms-Burton measure, which punishes foreign companies doing business with Cuba.

``We continue to believe that a negotiated settlement ... remains the right route to pursue,'' said Brittan.

``I, therefore, hope the U.S. administration will reflect long and hard about the wisdom of taking any action against Total,'' he said.