India's MRPL has bought UAE's Upper Zakum crude oil through a tender, two trading sources with knowledge of the deal said, as Iranian supplies are hit by European sanctions.

India plans to set up a Rs20 billion ($368.4 million) reinsurance fund to back local insurers in offering cover to refiners who process Iranian crude, government sources said, after refiners warned they will halt import from Tehran.

European Union and US sanctions aimed at forcing Iran to curb its disputed nuclear programme more than halved Iran's oil exports in 2012. The West believes Tehran's nuclear programme is aimed at making a bomb, but Iran denies that.

Mangalore Refinery and Petrochemicals Ltd (MRPL) bought about 650,000 barrels of Upper Zakum grade for May 1-15 lifting from trader Itochu at a premium of 55-60 cents a barrel over Dubai on FOB basis, the sources said.

In its previous tender MRPL bought 500,000 barrels of Banoco and 650,000 barrels of Oman oil from Shell for lifting in April.

The refiner has sought extra Saudi Arabian oil for April as it awaits clarity from India's government on how it will insure plants using crude from sanctions-hit Iran.

In a separate tender for sweet crude, MRPL bought 650,000 barrels of Gabon's Rabi light from Shell at a premium of about $3.30 a barrel to dated Brent on a delivered basis for May 1-15 lifting, one of the sources said.

MRPL, which operates 300,000 barrels per day refinery in Southern India, is Iran's top Indian client.

It aims to import 80,000 bpd of oil from Iran in the current fiscal year beginning April 1 provided sanctions against the country are eased or if the Indian government steps in to provide reinsurance.

India's import of Iranian oil declined 24 percent in April-February, data from trade sources shows.-Reuters