By Parisa Hafezi

TEHRAN (Reuters) -- Senior U.N. inspectors arrived in Tehran on Monday for talks on Iran's disputed nuclear program, a day after the Islamic state responded defiantly to tightened EU sanctions by halting oil sales to British and French companies.

The European Union enraged Tehran last month when it decided to impose a boycott on its oil from July 1. Tensions rose as Iran, the world's fifth-largest oil exporter, threatened to close the Strait of Hormuz, the main Gulf oil shipping lane, and the United States signaled it would use force to keep it open.

On Sunday, its oil ministry went a step further, announcing Iran has now stopped selling oil to French and British firms, although the move will be largely symbolic as France or Britain had already greatly reduced purchases of Iranian crude.

Exporting crude to British and French companies has been stopped ... We will sell our oil to new customers, spokesman Alireza Nikzad was quoted as saying on the ministry website.

China, in rare criticism of one of its major oil suppliers, rebuked Iran over the move. We have consistently upheld dialogue and negotiation as the way to resolve disputes between countries, and do not approve of exerting pressure or using confrontation to resolve issues, Foreign Ministry spokesman Hong Lei told a news briefing when asked about the matter.

China buys around 20 percent of total Iranian oil exports.

Iran, which denies Western allegations that it is covertly seeking the means to build nuclear weapons, has ramped up its rhetoric in recent weeks while also expressing willingness to resume negotiations on its nuclear project.

The five-member team from the International Atomic Energy Agency, led by the chief of its global inspectorate Herman Nackaerts, will have two days of talks in another effort to extract explanations regarding intelligence pointing to military dimensions to Iran's declared civilian nuclear program.

Asked if the IAEA delegation would visit Iran's nuclear facilities, Foreign Minister Ali Akbar Salehi told the student news agency ISNA: No. Their work has just begun.

DIPLOMATIC IMPACT

Diplomats played down any chances of a breakthrough.

I believe most are rather skeptical concerning the outcome because, well, Iran had a chance at the last meeting and didn't seize it, a senior Western official said, referring to the last trip by the senior IAEA team to Tehran at the end of January.

Referring to last week's announcements by Iran of new nuclear advances, he said: They send out the wrong signals that Iran is really willing to cooperate... We will wait and see what will come out of this meeting but we should be prepared that Iran might try some technical steps ... to appear cooperative without really providing the necessary cooperation.

The outcome of the discussions will have diplomatic repercussions because it could either deepen a stand-off that has stoked fears of war or provide scope to reduce tensions.

The European Commission says the EU would not be short of oil if Iran stopped crude exports as it has enough stock to meet the bloc's needs for around 120 days.

Industry sources said European oil buyers were already making big cuts in purchases from Iran months in advance of EU sanctions.

French and Anglo/Dutch oil majors Total and Shell have been big buyers of Iranian crude but Total had already stopped buying from Iran and traders said last week that Shell had scaled back sharply.

Shell, which has declined comment on its trade with Iran, was one of the biggest consumers of Iranian crude globally, taking about 100,000 barrels daily into Europe and about the same amount to its Japanese subsidiary, Showa Shell.

Latest EU data, for the third quarter of 2011, shows that oil sales into Britain fell to zero and France imported 75,000 bpd, accounting for just 6 percent of its crude oil imports.

Debt-ridden Greece is most exposed to Iranian crude disruption among EU countries.

MILITARY ACTION?

Iran says its nuclear program is entirely peaceful but its refusal to curb uranium enrichment, which can have both civilian and military ends, while shifting a key part of it to a remote mountain bunker protected from air strikes and continuing to restrict IAEA access, has raised concerns.

Western powers have not ruled out using force against Iran if diplomacy and sanctions fail to rein it in, and there has been intense public discussion in Israel about whether it should attack Iran to stop it weaponizing enrichment.

The top U.S. military officer said on Sunday that a military strike would be premature as it was not clear that Tehran would put its nuclear capabilities to developing a bomb.

I believe it is unclear (that Iran would assemble a bomb) and on that basis, I think it would be premature to exclusively decide that the time for a military option was upon us, said General Martin Dempsey, chairman of the U.S. military's Joint Chiefs of Staff.

He said he believed the Islamic Republic's government was a rational actor.

Chinese Foreign Ministry spokesman Hong said using force would be the wrong answer. Attacking Iran militarily would only worsen the confrontation and lead to further upheaval in the region, he said.

The West has expressed some optimism at the prospect of new talks with Tehran, particularly after it sent a letter to EU foreign policy chief Catherine Ashton last week promising to bring new initiatives to the table without stating preconditions.

In these negotiations, we are looking for a way out of Iran's current nuclear issue so that both sides win, Iranian TV quoted Foreign Minister Salehi as saying on Sunday.

Oil is a pillar part of Iran's export revenues and an important lifeline for its increasingly isolated economy. Tehran has little refining capacity and must import about 40 percent of its gasoline needs for domestic consumption.

Tighter sanctions, combined with high inflation, have squeezed the ability of working-class Iranians to feed themselves and their families, and this uncertainty will cloud a parliamentary election on March 2.

Everything's become so expensive in the past few weeks, said Marjan Hamidi, a shopper in Tehran. But my husband's income stays the same. How am I going to live like this?

(Additional reporting by Parisa Hafezi and Ramin Mostafavi in Tehran, Susan Cornwell in Washington and Fredrik Dahl in Vienna; Writing by Maria Golovnina; Editing by Mark Heinrich)