Iran has agreed to donate up to $25 million to Turkish Prime Minister Recep Tayyip Erdogan's Justice and Development Party (AKP), a British newspaper reported on Tuesday.

According to the Daily Telegraph, Iran agreed to bolster AKP campaign funds by up to $12 million, with further transfers of up to a total $25 million to be made later this year.

Erdogan has said he will run for a third term as prime minister in Turkey's 2011 general election.

The Turkish government denied receiving funds from Iran, the Telgraph said.

News of the deal appears to contradict a recent report by the International Crisis Group, which questioned Western fears that Turkey is abandoning traditional European ties in favor of a closer alliance with Iran.

Open gallery view Iranian President Mahmoud Ahmadinejad and Turkish PM Recep Tayyip Erdogan signing a nuclear deal in Tehran on May 17, 2010. Credit: AP

Earlier the week, Turkish voters' approved in a referendum a raft of government-backed constitutional amendments in a referendum.

Erdogan has said the amendments were needed to strengthen democracy and bring Turkey closer to European norms, vital to Turkey's hopes of joining the European Union.

But critics say the changes will give Erdogan's party control over Turkey's judiciary.