European Union leaders are scheduled to meet Thursday to consider a U.S. proposal that the E.U. cut off Iran’s access to a central European financial system that enables global transactions in euros, according to U.S. government officials apprised of the meeting.

U.S. officials have criticized the E.U. for allowing Iran to carry out financial transactions via the European Central Bank (ECB), which U.S. government officials say allows Tehran to skirt Western economic sanctions.

The impromptu meeting comes on the heels of a bipartisan congressional letter demanding E.U. leaders close a "significant loophole" in international sanctions that allows Iran to access the ECB, which converts currency into euros.

Congressional sources close to the discussions said that if the E.U. fails to close current loopholes, U.S. lawmakers are prepared to enact a tough new sanctions measure that would target financial institutions conducting euro transactions on Iran’s behalf.

"We do know about the March 7th meeting and will be watching closely," said one senior Senate source close to the discussions. "If there is no commitment to take action, we may consider new options to increase the pressure in Brussels."

Congress last week demanded that the E.U. take immediate action to close the loophole.

"We are writing to request your immediate support in closing a significant loophole in U.S.-E.U. sanctions policy," 36 U.S. senators led by Mark Kirk (R., Ill.) and Jeanne Shaheen (D., N.H.) wrote to the E.U. European Council. "We strongly urge you to take all necessary measures to immediately cut off Iran’s ability to use its foreign-held euros."

Tehran’s access to the ECB provides it with a significant financial lifeline as U.S. sanctions choke off other sources of revenue.

"Iran uses these [European financial] reserves to circumvent the total impact of American and European sanctions by converting its foreign-held euros into local currencies via the European Central Bank’s" so-called "Target2" system, the senators wrote. "We strongly urge you take all necessary measures to immediately cut off Iran’s ability to use its foreign-held euros by prohibiting direct or indirect access to Target2 services by or on behalf of accounts owned or controlled by the Government of Iran and its affiliates."

E.U. nations remain divided on the issue, according to a U.S. government source. Some have expressed support for America’s position while others remain opposed to tightening sanctions and closing existing loopholes.

The E.U.’s External Action Service (EEAS), a diplomatic corps that works on foreign affairs issues, will meet March 7 to review the U.S. Senate’s letter and consider what action to take.

"Some European nations will propose that the EU adopt a ‘U-Turn’ prohibition similar to the one adopted by the U.S. Treasury in 2008, which would effectively stop transactions conducted in euros on behalf of Iran by two non-European banks," said the U.S. government source.

Foreign second parties such as China could still enable Tehran to get its hands on euros even if a so-called "U-Turn" approach is adopted, sources cautioned.

"Even if the U-Turn idea was adopted, the E.U. would still need to figure out how to stop Asian clearinghouses that bundle euro transactions from settling Iranian transactions in euros," said the U.S. source.

Target2, or the Trans-European Automated Real-Time Gross Settlement Express Transfer system, is the ECB’s primary bank-to-bank payment system that conducts scores of transactions each day.

"If you've ever conducted a transaction in euros, you've probably used Target2—unless, of course, you're doing cash deals out of the back of your car," Jonathan Schanzer and Mark Dubowitz, sanctions experts at the Foundation for Defense of Democracies, wrote in a recent article highlighting the sanctions loophole.

"It also can be used unwittingly to aid Iranian sanctions-busting schemes," Schanzer and Dubowitz explained. "If an Iranian trader, for example, wants to convert euros from his Chinese bank account into yuan and then transfer those yuan to an account held by a Chinese producer of maraging steel (useful for building advanced centrifuges), the Iranian trader's bank will likely use the Target2 system."

An ECB spokesman told the Free Beacon that it is "fully complying" with the E.U.’s sanctions regime.

"The European Central Bank is fully complying with European Union (EU) sanctions against Iran, said Niels Bünemann, the ECB’s principal press officer. "The ECB ensures that no illegitimate transactions are cleared in Target2."

"Please note that such sanctions are adopted by the E.U. and do not fall within the ECB’s competencies," the spokesperson added.

Congress is readying legislation to target European banks should the E.U. fail to agree on a plan to close the loophole, congressional sources told the Free Beacon.

The draft measure would sanction any financial institution that is involved in or enabling Iranian transactions in euros or in other foreign currencies, according to draft legislation circulating on Capitol Hill.

The measure puts a particular emphasis on the Target2 system.

Sanctions would be imposed on any institution that "enables or facilitates" any "direct or indirect access to services provided by" Target2 on behalf of Iran’s central bank, according to the draft language.

Insiders believe the language will be added as an amendment to a new Iran sanctions bill up for consideration in the House or as an independent section to a forthcoming Senate measure.

The bipartisan House legislation currently under consideration would expand the number of blacklisted Iranian companies and seek to close European loopholes, such as those concerning the ECB.

Congress sealed similar loopholes in U.S. financial institutions last year.

Known as the SWIFT sanctions, the measure stopped the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global money transfer service, from handling transactions on behalf of Iran.