ASHGABAT: Turkmenistan has scrapped a $700 million contract for an Iranian company to build a key section of a major new railway line along the eastern shore of the Caspian Sea, state media said on Saturday.

Turkmenistan decided to annul the contract with Iran's Pars Energy Company, signed in January 2010, at a cabinet meeting chaired by President Gurbanguly Berdymukhamedov, state newspaper Neutral Turkmenistan announced.

Pars Energy had won the $696 million contract to build the Turkmen stretch of the new 900 kilometre (550 mile) railway that is to link Kazakhstan with northern Iran through Turkmenistan.

This is believed to the first time that Turkmenistan has cancelled a major contract with neighbouring Iran.

Berdymukhamedov was quoted as saying that the Iranian company was not able to carry out the construction "for some economic reasons" but did not give further details.

He added that Turkmenistan would now build the Turkmen stretch of the railway itself.

The new railway line "North-South" would provide a key new freight link from Kazakhstan's Aktau region through almost deserted areas of western Turkmenistan and then into northern Iran.

In Kazakhstan it could be linked to the Kazakh and then to the Russian railway systems. Turkmenistan was to have built its stretch of the railway with loans from the Islamic Development Bank and Pars Energy itself.

A US diplomatic cable released by whistle-blowing website Wikileaks from 2010 quoted accusations that Pars Energy was closely linked to Iran's powerful Revolutionary Guards although this has not been officially confirmed.

Ex-Soviet Turkmenistan, one of the world's most isolated nations, keeps a proud stance of neutrality in foreign policy and has been keen to tempt Western energy majors to help exploit its vast natural resources.