SINGAPORE (Reuters)—A major Chinese ship insurer will halt indemnity cover for tankers carrying Iranian oil from July, dealing a blow that narrows the insurance options for Tehran's main export already constricted by payment barriers caused by Western sanctions.

With Western sanctions on Tehran increasing, sources at the China P&I Club told Reuters on Thursday it did not want to stand alone in the market, especially after insurers in Japan and Europe plan to either limit or ban their own coverage for tankers operating in Iran.

This is the first sign that refiners in China, Iran's top crude buyer, may struggle to obtain the shipping and insurance to keep importing from the Middle Eastern country. Iran's other top customers—India, Japan and South Korea—are running into similar problems, raising questions on how Tehran will be able to continue to export the bulk of its oil.

Crude oil prices are up nearly 14% since the start of this year on concerns that Iranian supplies may be disrupted due to Western sanctions. Brent crude traded above $123 a barrel on Thursday.

The China P&I Club, whose members include major Chinese shipping firms Sinotrans and COSCO Group, is the first Chinese maritime insurer to confirm it will halt business with tankers operating in Iran.

"Many ship owners want to join our club and want our club to cover this risk, but considering all these regulations from the United States and the E.U., I know the China P&I club will not do that," said a Hong Kong-based official with the insurer, which provides coverage to more than 1,000 vessels.

"The China P&I club will not take the risk. We have asked our members not to go there, if they go there, they take their own risk," the official added, who wished not to be named because he was not authorized to speak to the media.

Starting in July, European insurers and reinsurers will be barred from indemnifying ships carrying Iranian crude and oil products anywhere in the world, in line with sanctions on Tehran.

Iran sells most of its 2.2 million barrels per day of oil exports in Asia, where China, India, Japan and South Korea are the four biggest buyers.

Growing pressure by the West has led some Iranian oil buyers to cut imports, but the problem over obtaining maritime insurance could altogether halt shipments to Asian customers. Chinese imports from Iran are already down more than 21% in the first two months of 2012 to around 395,000 barrels per day compared to the same period last year.

Along with Russia and the Middle East, China is one of the few remaining alternatives for Asian ship owners to replace European-based coverage. It is not clear if other Chinese ship insurers also planned to follow China P&I Club and cut coverage.

"I really don't know what will happen," said a Beijing-based Chinese industry official. "We are talking about $1 billion in coverage (per tanker). No single insurance company can handle that."

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European insurers provide cover for the majority of the world's oil tanker fleet. Industry officials say ship owners who still legally trade with Iran will be pressed to find sufficient, or comprehensive, alternative insurance.

"Western insurance companies, taking advantage of their market dominance, have been raising insurance costs gradually for ship owners," said a Chinese shipping executive.

"Now they say the don't want to provide cover to those disputed regions. China should really make its own comprehensive considerations (on this issue)."

An official with the China P&I club held out hope the European Union would decide on a last-minute easing of the sanctions. European nations are divided over the sanctions, while oil refiners, insurers and tanker owners face lost business opportunities with OPEC's second-largest producer.

"As far as I've seen with these new published sanctions, it seems to us that there might be some room for compromise," said a Beijing-based club official, who wished not to be named.

China P&I Club is not a member of the Group of International P&I Clubs, an association of customer-owned ship insurers which cover 95% of the world's tankers against pollution and personal injury claims. The Chinese insurer has applied to join the club and could be taking the action on Iranian coverage to ensure it becomes a member, industry sources said.

The Japan P&I club, the only Asian-based member of the Group of International P&I Clubs, said last month it would only be able to provide a fraction of cover for tankers operating in Iran.

"It's now non-life (insurers) and shippers who can tell us how many cargoes we will be able to ship from Iran," said a manager from a Japanese firm that buys Iranian crude, adding that importing cargoes without insurance was unthinkable.