Iran's state-owned Bank Mellat is looking to set up a branch in Malaysia's offshore financial centre of Labuan, a Malaysian newspaper reported on Tuesday.

Malaysian prime minister Abdullah Ahmad Badawi said the bank would help develop bilateral economic activity, according to the New Straits Times. He did not give other details.

'There is much we can do together to promote Islamic banking and financing,' Abdullah was quoted as saying during a visit to Tehran. 'Co-operation in this sector will facilitate trade and other business transactions between our countries.'

The two countries would work together to drive the growth of Islamic banking, he said.

Labuan is an offshore financial centre near Malaysia's eastern Sabah state which was set up to draw investments in banking, insurance, money broking, fund management and Islamic financial services.

The United States has targeted Bank Mellat, along with several other Iranian state banks, with sanctions in a bid to isolate Iran for its nuclear work that Washington says is designed to build bombs.  Tehran denies the charge.-Reuters