The move represents a welcome reprieve for a country that relies heavily on its neighbour for energy supplies.

Iraq buys gas and electricity from Iran to supply about a third of its power sector, worn down by years of conflict and poor maintenance and unable to meet the needs of the country's 40 million population.

The US blacklisted Iran's energy industry in late 2018 as it ramped up sanctions, but granted Baghdad a series of temporary waivers, hoping Iraq would wean itself off Iranian energy by partnering with US firms.

The latest extension extends into the start of US President-elect Joe Biden's mandate, as the administration of President Donald Trump departs the White House on January 20.

The new exemption, which is longer than previous extensions, was granted after "long discussions", the official told AFP on condition of anonymity.

The reprieve, however, does not solve all of Baghdad's energy problems.

Tehran has demanded nearly $6 billion in unpaid gas bills from Baghdad, recently reducing its supply to Iraq over the arrears.

While American exemptions allow Iraq to obtain supplies from its neighbour without risk of reprisals, they still prevent it from paying its Iranian bills in dollars -- a currency that Iran, choked by sanctions, badly needs.