The US has accused Russia of selling an advanced weapon to Iran and imposed sanctions on the state company involved.
The action has been taken just days before the Russian president, Vladimir Putin, is due to meet George Bush at the US presidential retreat, Camp David.
Tula KBP, a state-owned company making anti-aircraft and anti-missile devices, has been banned from doing business with the US and US companies for a year for selling the laser-guided Krasnopol M artillery shells to Iran.
Washington classifies Iran as a state sponsor of terrorism, and suspects it of having a nuclear weapons programme, under cover of a civil nuclear energy programme, in which Russian technology may play a part.
Yesterday the US undersecretary of state for arms control and international security, John Bolton, arrived in Moscow to discuss nuclear proliferation.
Russia's project to build an US$800m nuclear reactor in Iran is expected to be high on the agenda.
Tula KBP said it had not sold any arms to Iran and that the sanctions were a political move without teeth, since the US was not one of its clients.
Washington has previously accused the company of sending radar equipment to Iraq and missiles to Syria.
In a notice published on Tuesday it said the government had "determined that the government of Russia transferred lethal military equipment to countries determined by the secretary of state to be state sponsors of terrorism".
The sanctions have largely been interpreted as a gesture intended to heap pressure upon Moscow to further cool its relations with Tehran.
Normally Washington would impose sanctions on the entire country for such a breach.
But in this instance it has decided not to cancel the millions of dollars aid it gives Russia annually because it regards the disposal of the former Soviet Union army's nuclear arsenal as vital to national security.
Russia has refused to bow to international opposition to a contract with Iran to build a nuclear reactor at Bushehr, despite admitting recently that it shares Washington's concern about nuclear proliferation.
Russia has tried to allay the concern about its transfer of nuclear energy technology to Iran by having Iran return the spent fuel.
The plan appeared to hit an obstacle last week when Tehran demanded payment for the spent fuel.
But on Tuesday the Russian minister for atomic energy, Alexander Rumyantsev, said Iran and Russia had "no contradictions."
No date has yet been set for signing the contract.
An Iranian delegation is expected in Moscow next week to complete matters.
Many argue that the fuel is not the key issue.
A European diplomat said yesterday: "There is concern that the considerable number of Russian engineers living in Iran, and Iranian engineers coming to Russia to learn about nuclear science, might be gaining or transferring knowledge that could be accelerating Iran's nuclear weapons programme."
Hundreds of Iranians have been trained at nuclear technology institutes in various parts of Russia.
But Moscow insists that the students are taught only the technical language and the skills needed for peaceful energy plants.
Russian officials said there was no point putting pressure on them.
"It is not the first time America has made such demands, but there is no basis for it," a senior foreign ministry official said.
"In Russia we have very strict export controls. It is difficult to understand what their motivations are."
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