By Guy Faulconbridge and Jonathan Saul

LONDON (Reuters) - Islamic State militants have made more than $500 million trading oil with significant volumes sold to the government of Syrian President Bashar al-Assad and some finding its way to Turkey, a senior U.S. Treasury official said on Thursday.

The United States, France, Britain and Russia have vowed to defeat Islamic State, which uses an extreme interpretation of Islam to justify attacks and brutality in large parts of Syria and Iraq that it controls.

A U.S.-led coalition is bombing the hardline Sunni group, as is Assad's only big-power supporter Russia, in an attempt to kill its leaders and cripple the oil wells which the group uses to finance its rule and attacks abroad.

In one of the most detailed public explanations of Islamic State's oil trade, U.S. Treasury Department official Adam Szubin said militants were selling as much as $40 million a month of oil at the installations which was then spirited on trucks across the battlelines of the Syrian civil war and sometimes further.

"ISIL is selling a great deal of oil to the Assad regime," Szubin, acting under secretary for Terrorism and Financial Intelligence with the Treasury, told an audience at Chatham House in London.

"The two are trying to slaughter each other and they are still engaged in millions and millions of dollars of trade," Szubin said of Assad's government and Islamic State, also known as ISIS or ISIL.

The "far greater amount" of Islamic State oil ends up under Assad's control while some is consumed internally in Islamic State-controlled areas. Some ends up in Kurdish regions and some in Turkey, he said.

"Some is coming across the border into Turkey," Szubin said when asked for details on the money trail.

"Our sense is that ISIL is taking its profits basically at the wellhead and so while you do have ISIL oil ending up in a variety of different places that's not really the pressure we want when it comes to stemming the flow of funding - it really comes down to taking down their infrastructure," he said.

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Szubin said it was unclear whether the $40 million a month estimate could be multiplied over a year. But in remarks prepared for delivery, he said Islamic State had made more than $500 million from the oil trade, but did not give a more specific time period.

'SECURE THE TURKISH BORDER'

After Turkey downed a Russian fighter jet last month, Russian President Vladimir Putin said he had intelligence that large amounts of oil and petroleum products were moving across the border from Islamic State territories to Turkey.

The son of Turkish President Tayyip Erdogan has denied Russian allegations that he and his family were profiting from the illegal smuggling of oil from Islamic State-held territory.

"There is no question that better security, closing the Turkish border to flows is a key component right now and we are looking to the Turks to do more in that respect," Szubin said.

"It's not just a financial issue - it is about foreign terrorist flows, it's about weapons and it's about financing. I think securing that border would pay major dividends in terms of intensifying the pressure and also reducing the threat."

In an attempt to cut militants' links to the global financial system, Szubin said the United States had worked with Iraq to close down dozens of bank branches in Islamic State-held territories. Szubin said militants had looted up to $1 billion from bank vaults in Syria and Iraq, but he said Islamic State's oil trade was the main target.

Islamic State militants claimed responsibility for a Nov. 13 attack on Paris that killed 130 people and the Oct. 31 downing of a Russian passenger aircraft over Egypt’s Sinai region that killed 224.

They promise more attacks on the West and Russia and have claimed that U.S.-born Syed Rizwan Farook and his Pakistani wife Tashfeen Malik who killed 14 people in a mass shooting in Southern California last week were its followers.

IRAN BANKING

Szubin sought to soothe concerns about U.S. reaction to what is expected to be a boom in trade with Iran when Western sanctions are lifted as part of a nuclear deal between Tehran and six world powers reached earlier this year.

Many Western companies, including European ones, remain concerned about initiating trade with Iran fearing they could still fall foul of the complex layers of sanctions and potentially face fines or be cut off from the U.S. financial system.

Szubin acknowledged there would be a great deal of “caution and hesitancy” by international banks initially.

In 2014, the United States imposed a record fine on French bank BNP Paribas , which agreed to pay almost $9 billion to resolve accusations it violated U.S. sanctions against Sudan, Cuba and Iran.

Without naming any banks, Szubin said there had been some "very bad conduct" going on in the Western banking system in the mid-2000s and before.

"That conduct by and large stopped in 2007, 2008... we haven't seen reputable European banks doing this for close to a decade now," he said.

"If banks are being honest and accurate in describing what they are doing and there's an accidental payment that goes through the U.S. payment system that shouldn't, we are not going to look at the penalty cases, these massive enforcement cases."

He said once global sanctions were lifted, all non-U.S. companies would be able to invest in Iran and trade oil with Iran, though accompanying U.S. sanctions on Iran for supporting terrorism would remain.

(Editing by Toby Chopra and Grant McCool)