The European Union would ban the import of Iranian oil from July 1, giving member states nearly six months to wind up existing contracts, under a proposal by rotating EU presidency holder Denmark, EU diplomats said on Tuesday.

EU governments have already agreed in principle to impose a ban on Iranian crude as part of Western efforts to ratchet up pressure on Tehran over its nuclear programme. Details of how and when the ban will be implemented are still being ironed out and are being watched closely by edgy oil markets.

The compromise proposal aims to ease concerns among some of the EU's 27 governments about the economic impact of a ban on their economies, suffering from two years of debt turmoil.

The EU bought about a fifth of Iranian oil last year, collectively rivalling China as the main buyer. Italy, Spain and Greece have been big buyers, with debt-hit Athens relying on easier credit terms from Tehran to finance its purchases.

The EU embargo follows stringent new U.S. sanctions signed into law by President Barack Obama on New Year's Eve, which are being gradually implemented but if fully enforced would make it impossible for most countries to pay for Iranian oil.

The unprecedented effort to take Iran's 2.6 million barrels of oil per day off of international markets has kept global prices higher and helped cause a sharp fall in Iran's rial currency and a surge in the cost of basic goods for Iranians.

Western countries say the sanctions have been imposed to stop Iran from developing nuclear weapons. Iran says its nuclear programme is peaceful.

Under the Danish proposal, EU states would have until the end of June to fulfil existing contracts once an embargo is imposed, but would have to cease all imports at the start of July. No new contracts would be allowed before July.

The Danes put forward the compromise late on Sunday in an effort to bridge differences between countries such as France, which was seeking only a three-month grace period, and Greece, which was asking for as long as 12 months.

EU diplomats say the aim is to finalise discussions on the details of the planned embargo by the next meeting of EU foreign ministers on January 23, paving the way for its introduction days later.

The Danish presidency has made a proposal that the full embargo would start on July 1. There is no agreement yet, one EU diplomat said, speaking on condition of anonymity.

Denmark holds the EU's rotating presidency between January and the end of June, a role which gives it responsibility for organising the EU's agenda and chairing policy debates.

HAMMERING OUT COMPROMISE

Oil market experts say a grace period for existing contracts would blunt the initial impact of an embargo on bringing crude to Europe, because some 80 percent of purchases are covered by long-term contracts.

During discussions in recent weeks, Greece lobbied for leeway because of its heavy dependence on Iranian oil.

One EU diplomat said Greece was still withholding its approval for the Danish proposal while it sought to secure alternative supplies of crude. Any decision will have to be unanimously agreed by all member states.

Saudi Arabia, the top oil exporter and a foe of Tehran, has indicated it would be able to make up for any supply shortfall for countries that stop buying Iranian oil because of sanctions. Top officials from big Asian importers have visited in recent weeks.

A U.S. diplomat said on Tuesday diplomatic efforts were being made to secure more supply from other oil producers.

It has been reported that Spain has already made those kinds of inquiries and that Spain is supportive of this program despite the fact that they rely on Iranian oil for a certain supply, U.S. Ambassador to Spain, Alan Solomont, said in Madrid.

Another issue still being discussed was whether a review period would be agreed for the embargo. It was also unclear whether there would be a deal for the EU to impose sanctions on Iran's central bank, as Washington has done.

(Reporting by Justyna Pawlak and Julien Toyer; Editing by Mark Heinrich)