The European Union wants India to draw Iran into talks over its nuclear programme but said strong sanctions are also needed, European Council President Herman Van Rompuy said on Friday, as Asia's third-largest economy aims to increase trade with Tehran.

India has struck a defiant tone over new financial sanctions imposed by the United States and European Union to punish Iran for the nuclear programme, seeking to increase trade and barter arrangements to pay for oil supplies.

Van Rompuy said India and the European Union disagreed on the issue of sanctions, but that both wanted talks to resume on the nuclear issue.

"On the position of Iran, we have at least one common line that is we have to find a solution by diplomatic means. We have to negotiate on Iran's nuclear programme," Van Rompuy said after a trade summit in New Delhi where he called on India to use its strong economic ties to draw Tehran into talks.

"In order to acheve that result, you need more pressure on Iran, more sanctions on Iran," he said.

As well as deep historical ties, India and Iran have shared interests that include the stability of Afghanistan as Western powers draw down their troops. India is now Iran's main oil customer, even though it has diversified imports lately because of the payments problems thrown up by new sanctions.

At an earlier news conference, Prime Minister Manmohan Singh said the nuclear issue needs to be resolved through diplomacy and defended buying Iran's oil.

"Iran is a close neighbour. It is an important source for our energy," he said.

"There are problems with Iran nuclear programme. We sincerely believe that this issue can be and should be resolved by giving maximum scope to diplomacy," Singh said.

On the eve of the summit, India's trade secretary, Rahul Khullar, said there was no reason why India should not take advantage of business opportunities arising as European companies reduce sales to Iran.

Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food as the new sanctions kick in, hurting its ability to import basic staples for its 74 million people.

A large delegation of Indian businessmen is heading to Tehran in the next few weeks to explore new trade opportunities. India observes U.N. sanctions but was still free to trade a vast range of products with Iran, Khullar said.

Reuters surveys of commodities traders around the globe show that since the start of the year, Iran has had trouble securing imports of basic staples like rice, cooking oil, animal feed and tea. Grain ships have been held at its ports, refusing to unload until payment can be received for cargo.

Difficulty paying for urgent import needs has contributed to sharp rises in the prices of basic foodstuffs, causing hardship for Iranians with just weeks to go before an election seen as a referendum on President Mahmoud Ahmadinejad's economic policies.

Substantial progress

Van Rompuy also said India and the EU have made 'substantial progress' towards concluding a deal that would create one of the world's largest free trade areas.

European Commission President Jose Manuel Barroso said a deal could be struck by autumn of 2012.

The EU has been negotiating such a deal with India since 2007 but the talks have snagged on issues such as slashing import tariffs on European cars, and easing visa regulations for Indian professionals.

Singh, speaking alongside Van Rompuy at the news conference, said he hoped the deal would be concluded at the 'very earliest'.