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MUSCAT, Jan 27 (Reuters) - An Omani sovereign wealth fund has signed an understanding with Iran’s biggest auto maker, Iran Khodro Industrial Group, to study a proposal for a $200 million auto plant in Oman, a fund official said on Wednesday.

The memorandum of understanding is one of the first signed between a major Iranian company and a Gulf Arab state since international sanctions against Iran were lifted earlier this month. Traditionally, Oman has had closer ties to Iran than its Arab neighbours.

Saudi Arabia said this month it was cutting all ties with Iran, including business links, when its Tehran embassy was attacked by Iranian protesters after the kingdom executed a leading Shi’ite cleric.

Oman Investment Fund agreed with Khodro to study the creation of a venture, Orchid International Auto, that would set up a plant at the southern Omani port of Duqm, Khalid al-Yahmadi, investment director for resources, manufacturing and logistics at the Omani fund, told Reuters.

The venture would be owned 60 percent by the fund, 20 percent by Khodro and 20 percent by an Omani investor, Issa al-Ryiami. It would start as an assembly facility and move gradually towards manufacturing automobiles, Yahmadi said without elaborating on what kind of vehicles would be assembled.

“The total investment is expected to be $200 million for all the phases,” he said, adding that a feasibility study would be completed in months and the partners hoped to break ground before the end of this year.

Oman, seeking to diversify its economy beyond oil, is keen to establish industrial ventures. France’s PSA Peugeot Citroen supplied kit versions of its 206 and 405 models to Khodro for assembly before 2012, when the sanctions forced it to withdraw from Iran; Peugeot is now trying to renegotiate a new tie-up with Khodro.

Afshin Dastani, an executive who identified himself as a manager at Orchid International Auto, said construction of the plant at Duqm would take a year and it was expected to start production by 2017.

The executives were speaking at an exhibition for Iranian companies that opened in Muscat on Wednesday. Almost 70 firms participated in the event, mainly manufacturers with a focus on automobiles, tyres and spare parts.

Oman’s energy minister said last week that he expected speedier completion of a planned pipeline to import natural gas from Iran now that international sanctions against Tehran had been lifted. (Writing by Andrew Torchia; Editing by Ruth Pitchford)