BEIJING: Iran has cancelled a $2 billion contract for a Chinese firm to help build a hydroelectric dam in the country, Chinese state media said on Thursday, a move that risks upsetting Beijing, one of Tehran's most important economic and political allies.

Iranian President Mahmoud Ahmadinejad is due to visit China next week for a security summit, where he is expected to hold talks with his Chinese counterpart, Hu Jintao, on Iran's disputed nuclear programme.

In March 2011, Iran's official IRNA news agency said China's Sinohydro Corp. had signed a contract with Iranian hydro firm Farab to build the dam, described as the world's tallest, in Iran's western province of Lorestan. It was designed to support a 1,500-megawatt power station.

The Global Times, a popular tabloid owned by Chinese Communist Party mouthpiece the People's Daily, said the Iranian government had decided to cancel the contract. The report did not cite sources or give a reason for the cancellation.

But it quoted Iranian media reports as saying Iran's central bank was "dissatisfied" with financing options offered by China.

Sinohydro was not immediately available for comment.

China and Iran have close energy and trade ties, and Beijing has repeatedly resisted U.S.-led demands to impose tougher economic sanctions on Iran to curb its nuclear ambitions.

However, differences have arisen between China and Iran in the development of Iran's oil and gas resources.

State-owned China National Petroleum Corporation was given a month's deadline by Iranian Oil minister Rostam Ghasemi in April to make a serious start on the giant South Pars gas field after 32 months of delay.

In September last year, Reuters reported China's reluctance to progress with oil and gas investments in Iran.

Many foreign companies have been forced to pull out of the Iranian energy sector due to the fear of sanctions, but state-owned Asian firms are less susceptible to Western pressure to stay away from the Iranian market. -- AGENCIES