A legal adviser to the European Union's top court has said on Wednesday that a German company was wrong to terminate its contract with an Iranian bank if its only justification was concern about becoming entangled in US sanctions on Iran.

The opinion is not binding and the case will not go to the European Court of Justice, but it revives a transatlantic dispute over the international reach of U.S. economic sanctions and how they undermine European priorities.

The case was brought by Bank Melli Iran, which has a branch in Hamburg, and is being heard in German courts. German judges asked the EU's top court for advice.

Three European powers, France, Germany and the United Kingdom, together with the United States are currently negotiating with Iran to revive the 2015 nuclear agreement, the Joint Comprehensve Plan of Action, JCPOA. Lifting of the US sanctions in exchange for Iranian full compliance with the agreement is the main issue.

Telekom Deutschland, part of the Deutsche Telekom group that generates half of its turnover in the United States, ended its contract with Bank Melli Iran after the United States reimposed sanctions on Iran in 2018.

Then US President Donald Trump withdrew from the 2015 nuclear accord between Iran and world powers, including the European Union, and reimposed a wide array of sanctions on the Islamic Republic.

This left European allies scrambling to salvage the pact and European companies with big operations in the United States facing a dilemma of whether to continue business with Iran, seen by many of them as a potential growth market after the 2015 deal.

The international reach of the US financial system and the US presence of many European companies has been a big factor in dealings between Iran and its potential Western suppliers.

A decision by an EU company to stop doing business with an Iranian company "should be regarded as invalid if it cannot be justified on any ground other than the desire to comply with US legislation," Advocate General Gerard Hogan said in a statement released by the court in Luxembourg.

Hogan's opinion statement also said Iranian companies should be able to invoke EU law blocking so-called US secondary sanctions before the courts of EU states.

The EU has a blocking statute to counter US sanctions, although it has never been used. It bans any EU company from complying with US sanctions and does not recognize any court rulings that enforce American penalties. But no major company so far has taken the risk to deal with Iran, given possible third-party penalties by the US.

The court adviser said the blocking statute should still oblige EU companies to explain to an Iranian company under U.S. sanctions why they are ending commercial relationships.

"If it were otherwise, an entity could quietly decide to give effect to the US sanctions legislation and ... the major policy objectives of the EU blocking statute would be compromised and set at naught, as seems to have happened here," Hogan said of the Telekom Deutschland case.

Reporting by Reuters