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U.S. says working with oil producers to expand production

WASHINGTON (Reuters) - The United States is working with Saudi Arabia and other major oil producers to ensure their production is expanded to help mitigate any supply disruptions and tensions caused by Western sanctions on Iran, Treasury Secretary Timothy Geithner said on Tuesday.

"The best thing we can do is work with major oil producers to make sure their supply is expanded to meet not just the growing demand from growth but to offset any disruptions," Geithner told a congressional panel.

Saudi Arabia earlier announced it will fill any oil supply gap created by the loss of Iranian oil - a move Geithner said has brought a "measure" of calm to markets.

Supply disruptions in Syria, South Sudan and Yemen, as well as the looming U.S. sanctions and European oil embargo kept Brent crude oil prices above $125 a barrel on Tuesday.

If Tehran's trading partners fail to reduce their Iranian oil imports by mid-year, their financial institutions could be banned from U.S. markets. The Obama administration has already exempted Japan and 10 EU nations because they have already cut down on their Iranian crude purchases.

China, the top buyer of Iranian crude, and eleven other countries could see their banks penalized if they do not comply with the latest round of U.S. sanctions by the end of June deadline.

Geithner said the Obama administration was working closely with many countries including China, Russia, India and Turkey to tighten up the sanctions on Iran - which the West accuses of developing atomic weapons.

"They share our basic recognition that their interests also could be affected by Iran" getting nuclear weapons, Geithner told a House subcommittee hearing to examine the administration's budget request for fiscal 2013.

"We have seen some progress and we expect to see more... based on our conversations, my sense is that they will continue to work with us," he said.

(Reporting By Rachelle Younglai; Editing by Chizu Nomiyama)

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