"The court dismisses the action and upholds the fund-freezing decision," the Luxembourg-based Court of First Instance said in its decision on Melli Bank, a British public limited company.

Melli Bank is owned by Bank Melli Iran (BMI), an Iranian bank controlled by the Iranian state, and the court said it was possible that BMI could exert pressure on entities it owns to circumvent the sanctions.

"Freezing of the funds of entities owned or controlled by an entity engaging in nuclear proliferation is necessary and appropriate in order to ensure the effectiveness of the measures adopted," it said in a statement.

The EU move in June 2008 was part of the process of implementing a series of UN sanctions against Iran adopted since 2006, which are aimed at persuading Tehran to suspend uranium enrichment activities.

Uranium enrichment provides fuel for nuclear reactors but at highly refined levels it can be used to build an atomic bomb, which is what the Western powers fear the Islamic republic could be trying to do.

Tehran insists it simply wants nuclear energy for a growing population whose fossil fuels will eventually run out. It has rejected calls to suspend enrichment.

Top EU diplomats have been trying to persuade Iran -- on behalf of Britain, China, France, Germany, Russia and the United States -- to stop enrichment in exchange for political and trade incentives.

But those efforts have ground to a halt amid violent protests over last month's contested presidential election.

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