Iranian gas is crucial for Iraq's electricity generation, but US sanctions on Iranian oil and gas impose restrictions on how Baghdad can pay for the imports.

Iraq cannot directly hand over cash to Iran, but payments must be held in a bank account and be used by Tehran to fund imports of food and medicines.

The payment system has left Iraq in heavy arrears and prompted Iran to respond by periodically switching off the taps.

Ravaged by decades of conflict and international sanctions, oil-rich Iraq relies on Iranian gas imports for a third of its energy needs. It is also beset by rampant corruption, and suffers from dilapidated infrastructure.

Ten days ago Iran halved its supply of gas to Iraq because of unpaid bills of more than $12 billion, deposited in an Iraqi bank account but which Tehran cannot use, Prime Minister Mohamed Shia al-Sudani said in a televised address Tuesday.

His office said in a statement that Baghdad and Tehran had signed an agreement Tuesday after several days of talks for "the import of Iranian gas to fuel Iraqi power plants, in exchange for Iraqi crude oil".

"The agreement aims to address the gas supply crisis for power plants, while tackling payment issues and complications arising from US sanctions," the statement said.

Recent gas supply stoppages have only worsened the frequent power outages much of Iraq sees during the hot summer months, when temperatures regularly reach 50 degrees Celsius (122 degrees Fahrenheit).

In his televised address, Sudani said: "As the American side did not give the necessary permission for the transfer of funds... the supply of Iranian gas was stopped.

"Because of the transfer mechanism and its complexity, we were unable to obtain authorisation to transfer these outstanding payments so our Iranian neighbour could continue to supply us" with gas, he said.

Sudani called the payment mechanism "complex due to the severity of the sanctions and the complicated procedures of the US Treasury", but added that a recent payment to Iran of around $1.9 billion had been made.

Tuesday's agreement with Iran meant "we will be able to guarantee that the gas will continue to flow", Sudani said.

To reduce its dependence on Iranian gas, Baghdad has been exploring several possibilities including imports from Gulf countries such as Qatar, as well as recovering flared gas from oilfields.