NEW DELHI (Reuters)—India has allowed state refiners to import Iranian oil, with Tehran arranging shipping and insurance, from July 1, keeping purchases of over 200,000 barrels per day (bpd) flowing after European sanctions hit insurance for the cargoes, government and industry sources said.

India, one of Iran's biggest crude buyers, has just secured a waiver from U.S. sanctions which target Tehran's nuclear ambitions by cutting imports over 20%.

But European sanctions that come into effect from July 1 ban insurers and reinsurers from covering shipments of Iranian oil, leaving buyers in Asia—Iran's biggest market—struggling for cover.

Around 90% of the world's tanker fleet is covered by Western-based protection and indemnity clubs, which insure against personal injury and environmental cleanup claims.

Among other Asian buyers of Iran oil, Japan will provide sovereign guarantees for Iranian shipments, China has asked Iran to deliver the crude, and South Korea will halt imports from July.

"Yes, we have allowed them to buy oil from Iran on CIF (Cost, Insurance and Freight) basis," said a senior shipping ministry official.

Unlike private refiners, India's state-run companies need government permission to import oil on a CIF basis as federal policy requires them to favor Indian insurers and shippers by buying only on a Free on Board (FOB) basis.

India aims to buy 310,000 bpd of oil from Iran under contracts during the fiscal year from April to March, which includes 100,000 bpd of purchases by Essar Oil, the only private customer.

The United States earlier this month extended exemptions from its tough new sanctions on Iran's oil trade to seven more economies including India, but China remains vulnerable.

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Indian state insurers led by General Insurance Corp. (GIC) had agreed to provide $50 million of cover for the ships carrying Iran crude from July, but this has been delayed as the insurance regulator has not yet given its approval.

The Shipping Ministry has said it has "no objection" to refiners buying oil from Iran on a delivered basis "for 6 months with effect from July 1, 2012 or until GIC provides P&I/H&M (Hull and Machinery) cover or U.S., E.U. sanctions are lifted, whichever occurs earlier," said a source privy to the letter.

A source at a refining firm also confirmed receipt of the letter.

Mangalore Refinery and Petrochemicals (MRPL) had already switched to insuring the oil with Iran Insurance Company, as its policy lapsed and local insurance companies refused to extend the cover, wary of the sanctions.

It remains unclear, however, how much crude Iran can actually export as it is using most of its vessels for storing crude as exports decline ahead of the new sanctions. The International Energy Agency estimates Tehran's exports have fallen 40% since the start of the year.

In addition, the Iranian tanker fleet is mostly Very Large Crude Carriers whose draught is too deep for Indian ports.

Indian state-refiners buy Iranian oil in Aframax and Suezmax tankers.

In July, state-run Hindustan Petroleum Corp. is planning to buy a Suezmax cargo, while MRPL seeks to buy five Aframax cargoes. Purchase volumes fluctuate from month to month.

IOC, the country's biggest refiner, was not planning to buy any cargo from Iran in July, a company source said earlier.