WASHINGTON—More than 90 U.S. senators signed a letter to President Barack Obama pressing him to sanction Iran's central bank, with some threatening legislation to force the move, an outcome that would represent a stark escalation in tensions between the two countries.
Such a measure, if effectively implemented, could potentially freeze Iran out of the global financial system and make it nearly impossible for Tehran to clear billions of dollars in oil sales every month, said current and former U.S. officials.
Many American officials view the blacklisting of Bank Markazi as the "nuclear option" in Washington's financial war against Tehran.. Some Iranian leaders have said they would view such a move by the Obama administration as an act of war.
The letter was co-sponsored by Sens. Mark Kirk (R., Ill.) and Charles Schumer (D., N.Y.) in a sign of the bipartisan support for tougher financial measures against Iran. The U.S. fears Iran is developing nuclear weapons, a charge Tehran denies.
"In our view, the United States should embark on a comprehensive strategy to pressure Iran's financial system by imposing sanctions on the Central Bank of Iran," said the letter that was viewed by The Wall Street Journal and will be delivered to the White House on Tuesday. "If our allies are willing to join, we believe this step can be even more effective."
A senior U.S. official said the Obama administration is studying all measures to increase pressure on Iran, including potential moves against Bank Markazi.
"We are working really hard on the Iran challenge and have made unprecedented progress in mobilizing international pressure and sanctions," the official said.
Last year, Congress passed legislation barring from the U.S. financial system any foreign firm doing business with sanctioned Iranian banks, Iran's energy sector, or the businesses of Tehran's elite military unit, the Islamic Revolutionary Guard Corps. The law also has a provision allowing the White House to sanction Bank Markazi, a step that President Obama has so far decided not to take.
In an interview, Mr. Kirk said he would introduce a law by year's end to enforce sanctions on Bank Markazi if the White House doesn't move independently.
"The administration will face a choice of whether it wants to lead this effort or be forced to act," Mr. Kirk said.
Mr. Schumer said the White House needed to utilize current legislation.
"It's time for the administration to use the tools Congress has provided and choke off the money spigot," he said in a statement.
Both the Obama and George W. Bush administrations have discussed the merits of targeting Iran's central bank going back at least four years, according to current and former U.S. officials.
The U.S. and European governments believe Bank Markazi has facilitated trade for sanctioned Iranian banks and businesses by masking the names of the parties involved in international transactions.
U.S. officials also worry Iran's central bank has provided funds to organizations designated as terrorist groups by Washington, such as Hezbollah in Lebanon and Hamas in the Palestinian territories.
Iranian officials have said in recent interviews that they view all U.S. and United Nations sanctions as illegal and that their country is entitled to conduct international trade.
Current and former U.S. officials who have taken part in the sanctions debate said that targeting Bank Markazi presents significant hurdles.
In recent years, American allies in Europe and Asia have worried that any blacklisting of Iran's central bank will inhibit their ability to purchase Iranian oil and potentially lead to higher global energy prices. Iran is the third-largest oil exporter among the Organization of Petroleum Exporting Countries.
Nations including China, South Korea and India have experienced trouble purchasing Iranian oil.
New Delhi alone has been unable to pay Iran $5 billion for oil purchases, according to Indian officials.
U.S. officials have worried that unilateral Americans sanctions against Bank Markazi might not be respected by even some American allies. This could place Washington into the difficult position of either backing down or theoretically trying to ban important foreign companies and governments from using the U.S. financial system.
An American official involved in the discussions said any U.S. decision would require months of prior discussions with countries such as South Korea, Japan and Saudi Arabia in order to get their buy-in.
Congress and the Obama administration have tussled over the issue of Bank Markazi for a number of months. Senators placed holds on the confirmation of two key U.S. officials—Deputy Secretary of State William Burns and Under Secretary of Treasury David Cohen—seeking assurances the White House would take steps to sanction the bank.
Mr. Kirk said in the interview these holds were eventually lifted because both Messrs. Burns and Cohen offered assurances the issue was being seriously studied. "They cited an August to September point of action," Mr. Kirk said, acknowledging there were no promises made.
Officials at the State Department and Treasury Department said they couldn't comment on private conversations held with members of Congress.