The measures, signed into law by President George W Bush, penalise any foreign company which invests more than $20m a year in either country's oil or gas industry.

My administration shares the Congress' deep concerns about the objectionable policies and behaviour of Iran and Libya

President Bush

The US accuses Iran and Libya of involvement in international terrorism, and says the sanctions will make it harder for the two countries to raise money to back terrorist groups.

It also accuses them both of seeking to develop weapons of mass destruction. Both countries deny the accusations.

Mr Bush said in a statement that he was deeply concerned about the "objectionable policies and behaviour of Iran and Libya".

Gaddafi: Denies Lockerbie responsibility

The US wants Libya to accept responsibility for the Lockerbie bombing and pay compensation to relatives.

And Iran, said Mr Bush, was causing serious concerns over its "support for terrorism", and opposition to the Middle East peace process.

"I hope that the Iranian people's recently expressed desire for a freer, more open and more prosperous society will give our two countries an opportunity to identify areas where our interests converge, and where we can work together constructively for our mutual benefit," he said.

European anger

The extension had already been approved by the House of Representatives and the Senate.

The new law has been criticised by the European Commission.

External Relations Commissioner Chris Patten said such measures threatened the open international trading system.

Mr Patten said the EU would take measures against the US through the World Trade Organisation if any action was taken against European companies operating in Iran and Libya.

Mr Bush said US concerns over the two states were being addressed in a number of ways.

"In particular, we are strengthening our efforts with other countries, whose co-operation is essential to pursuing the most effective approaches to solving the problems of proliferation and terrorism addressed by (the Iran and Libya Sanctions Act)," his statement said.