The two nations have not been able to find a solution in a dispute over how New Delhi should pay for oil imports from Tehran after India's central bank said last month that payments to Iran could no longer be settled using a long-standing clearinghouse system run by regional central banks.

The decision, taken weeks after US President Barack Obama visited India, was praised by Washington, which said it would reduce what it sees is a misuse of funds by Iran to support its nuclear activity, which the US suspects has military aims.

"I am extremely hopeful of an amicable solution," Sundareshan said, referring to a meeting of Indian officials with National Iranian Oil Co (NIOC) later this week.

Iran has agreed to keep sales running through January, but beyond that the flow of 400,000 barrels per day of crude that India buys from its second-largest supplier hinges on finding a permanent solution over payments.

"Oil imports from Iran are continuing on the basis of guarantees which companies have given them (NIOC) ... NIOC is also equally keen to sell to us and will participate in the solution," Sundareshan said, but did not elaborate on the form of guarantees provided by the oil companies.

He confirmed that the country's largest lender, State Bank of India, which oil companies use to handle their trade payments, has stopped issuing letters of credit in the absence of a payment mechanism.

"We would require payments to be channelled through alternate banks, which will be suggested by NIOC. We have on the table some banks which have been suggested. We will work through them."

Indian firm Mangalore Refinery and Petrochemical Ltd has sought as much as 2.6 million barrels from the spot market, in the face of any possible supply disruption due to the payment row.

CAIRN-VEDANTA DECISION

Sundareshan also said the oil ministry has sought 100 billion rupees ($2.2 billion) of additional subsidies from the finance ministry for state oil retailers as compensation.

Profitability at two of India's top state-run oil firms is being hit by rising global crude prices as the government delays increasing state-set fuel prices due to political pressure amid high inflation.

Sundareshan told reporters a decision on the proposed Cairn-Vedanta deal would be made by end-January or early February.

Last month, Oil Minister Murli Deora said India would make a decision by March, further delaying a key nod by a month, citing "too many complications" on whether to allow U.K. explorer Cairn Energy to sell a majority stake in its local unit to Vedanta Resources.

On Monday, the Economic Times reported that Prime Minister Manmohan Singh had directed the oil ministry to decide on whether to approve or reject the Cairn-Vedanta deal within this month, citing a PMO official who did not wish to be identified.

Last August, Cairn Energy agreed to sell a stake of 40 to 51 percent in its Indian arm, Cairn India to Vedanta in a deal worth up to $9.6 billion.