Iranian and Pakistani leaders inaugurated the construction of a much-delayed section of a $7.5 billion gas pipeline linking the two neighbours Monday, defying the threat of US sanctions.
President Mahmoud Ahmadinejad launched the project with his Pakistani counterpart Asif Ali Zardari at a ceremony on the border, hailing a blow to US-led sanctions targeting his country's oil and gas sector.
The two leaders unveiled a plaque before shaking hands and offering prayers for the successful conclusion of the project, which involves the laying of a 780 kilometre (485 mile) section of the pipeline on the Pakistani side, expected to cost some $1.5 billion.
"The completion of the pipeline is in the interests of peace, security and progress of the two countries... It will also consolidate the economic, political and security ties of the two nations," they said in a joint statement.
Ahmadinejad hailed the fact that work on the new section of pipeline was going ahead despite US sanctions against Iran's oil and gas sector imposed over its controversial nuclear programme.
"This gas pipeline is a show of resistance against domination," Ahmadinejad said.
"There are some nations who are against the progress of people, and so they are using the nuclear issue as a pretext to hinder the progress of the nations." he said.
"This pipeline has nothing to do with the nuclear issue, you cannot build a nuclear bomb with natural gas," he said, speaking alongside Zardari in comments broadcast live on state television.
"This pipeline is peacemaker, so if those countries are not cooperating, then they should not get in the way."
Although the pipeline on the Iranian side has almost been completed, Pakistan has run into repeated difficulties in financing the project in the face of the threat of US sanctions.
Like the European Union, Washington has slapped crippling unilateral sanctions on Iran, over and above UN sanctions imposed over its refusal to suspend uranium enrichment.
The Karachi Stock Exchange slumped almost 2.5 percent on fears of possible US sanctions over the deal.
"There was a panic-like situation in the market as investors fear United States may impose economic sanctions on Pakistan because of the gas pipeline," analyst Mohammad Sohail of Topline Securities told AFP.
"The market experienced turmoil all the day, it never recovered till it suspended trading."
Pakistani analysts said a statement from the US State Department was expected later Monday, which could determine the future course of the market.
In the face of the sanctions threat, Iran eventually agreed to finance a third of the costs of the Pakistani part of the pipeline, with the work to be carried out by an Iranian company.
Pakistan says it plans to generate 20 percent of its electricity using Iranian gas from the pipeline.
The visit was Zardari's second to Iran in a fortnight and came after officials said a consortium would start work on the pipeline on Pakistani territory despite the US sanctions threat.
Analysts said Zardari's Pakistan People's Party was likely to seek to exploit its defiance of Washington over the pipeline to boost its popularity ahead of a general election in May.
"They will say that we signed the deal with Iran despite US pressure and try to convince voters that we can stand against the US," political analyst Hasan Askari said.
Anti-US sentiment runs high in Pakistan and five years of PPP government have done little to address the country's crippling energy crisis, with severe shortages of electricity in the summer and gas in the winter.
Iran has promised $500 million to help Pakistan with the cost of building its side of the pipeline, but it is unclear where Islamabad -- grappling with a weak economy -- will find the remaining $1 billion it needs to complete the work.
Iran has the second largest gas reserves in the world but has been strangled by a Western embargo that has seen its crude exports halved in the past year.
It currently produces around 600 million cubic metres of gas per day, almost all of which is consumed domestically due to lack of exports. Its only foreign client is Turkey, which buys about 30 million cubic metres of gas per day.