"Today, the Iranian firms have been invited to bid in building refineries which the ministry has already announced it was planning to build," spokesman Asim Jihad told Reuters.

Iran and Iraq, which fought a bitter war in the 1980s, have been strengthening ties since the U.S.-led invasion in 2003, arousing concern among Iraq"s once dominant Sunni minority and other Arab states as well as in the United States.

Washington, which considers Iran part of an "axis of evil", accuses Tehran of meddling in Iraq. But the two countries, which broke ties in 1979 after Iran"s Islamic Revolution, have said they will hold talks within weeks in Baghdad to discuss helping Iraqi people.

Mustafa Alani, senior consultant and director of the security department at the Dubai-based Gulf Research Centre said the invitation for Iran to bid was probably politically motivated. Iran was unlikely to be able to meet Iraq"s refining needs.

"It doesn"t make sense," he said. "First of all Iran doesn"t have the know-how and the technology. Secondly, they are suffering from their own problems. They are short of supplies themselves and are looking at rationing oil products."

Iraq wants to build at least four refineries to help it solve chronic fuel shortages. The ministry said last year that it wants to build Nahrain, just south of Baghdad, with a capacity of 140,000 barrels per day. A second refinery at Kuya in the north, is projected at 70,000 bpd.

Iraq also plans to build a refinery in Nassiriya, south of Iraq, for export purposes with a capacity of 300,000 bpd and another in southern Amara.

Iraq has eight oil refineries, none of which were damaged during the invasion. Oil officials say that the plants are operating at only 50 percent-75 percent of capacity, forcing Baghdad to import most of its fuel.

PIPELINE TALKS

Jihad said that Oil Minister Hussain al-Shahristani agreed with the Iranian ambassador on Wednesday to activate an agreement to build a pipeline to carry about 200,000 bpd of Iraqi crude to Iran"s southern refineries.

"They have agreed that the technical committees should begin within days mutual visits to discuss costs and the time they need to build the pipeline," Jihad said.

"The Iranians will buy the crude based on market price."

Iraq needs to attract investment from international oil companies to develop its oilfields and increase production.

Oil multinationals are waiting until a new hydrocarbon law, which sets the rules of investment in Iraq to be passed by the parliament before pumping cash into Iraq. International oil firms are eyeing its giant and largely underdeveloped oilfields.

Oil is the country"s main source of the hard currency needed to rebuild its economy, and the energy sector is struggling to recover from years of mismanagement and sanctions.

PIN/REUTERS