Ali Mussawi, spokesman for Iraqi Prime Minister Nuri al-Maliki, said that Baghdad's trade and dealings with Tehran were below "the permitted level" for neighbouring countries, and dismissed claims Iraq was selling oil on Iran's behalf as a "big lie".

"We are dealing with Iran in a public and transparent fashion, we have not done any secret deals," Mussawi told AFP.

"We feel that we have dealt with Iran less than the permitted level."

He said of enforcing sanctions against Iran: "There is always a permitted level for neighbouring countries.

"International officials and Americans always emphasise that the international sanctions on Iran do not apply to Iraq for many reasons."

The New York Times reported on Sunday that Iraq was carrying out an array of tasks within a network of financial institutions and oil-smuggling operations that have helped funnel cash to Iran as sanctions choke its economy.

Mussawi, however, insisted that Iraq's central bank was an independent institution and was not subject to Maliki's orders, and said of the Times's claims Iraq was selling oil on Iran's behalf: "This is a big lie."

But he added that some oil was being smuggled through Iraq's autonomous northern Kurdistan region, which he said was not only breaking sanctions, but also infringing on Iraq's sovereignty.

"We have warned about this from the beginning," Mussawi said. "It (oil smuggling via Kurdistan) is not only breaking sanctions, but Iraqi oil is being smuggled out of the country, and not through Iraq's main pipelines."

Iran and Iraq, which fought a 1980-1988 war that was one of the bloodiest conflicts of the past century, killing an estimated one million people, have drawn closer since the US-led invasion of 2003.

The US sanctions, and others imposed by the European Union, aim to pressure Tehran to roll back its nuclear activities, which the West fears are geared to developing atomic weapons. Iran denies its programme is anything but peaceful.

General Martin Dempsey, chairman of the US Joint Chiefs of Staff, who is due to fly to Iraq this week after talks in Afghanistan, will be the highest-ranking American to travel there since the end of the troubled US military mission in the country.

Speaking to reporters late Sunday aboard his plane en route to Afghanistan, Dempsey acknowledged arch-foe Iran was trying to expand its influence in Iraq but said the Baghdad leadership wanted to build up relations with the American military.

"I believe they've concluded that they missed a window of opportunity to establish a more normal relationship with us," said Dempsey, referring to discussions with Iraqi defence chiefs.

"I don't mean to say we're coming back to Iraq," he said.

"I think they recognise their capabilities may require yet more additional development and I think they're reaching out to us to see if we can help them with that."

The Iraqi defence minister and military chief have both inquired about staging drills with the US military, organising training for Iraqi officers and other "security cooperation", Dempsey said.

His visit coincides with growing concern in Washington that Iran may be funnelling supplies to the regime in Syria through Iraq.

Dempsey did not comment directly on the reports but said: "I will of course express our concern about Iranian influence in Syria."

The general also said he could not confirm reports that Tehran is circumventing economic sanctions by illegally operating in Iraqi financial markets, gaining access to much-needed US currency.

"I've read the reports. I've queried the system for as much intelligence as I can gain," he said.

The general predicted that Iran would seek to strengthen its presence in Iraq if its allies in Syria fall from power.

"My judgment would be that if their position erodes in Syria, my guess is they would seek to increase their influence in Iraq. Strategically, they will seek some other outlet."