Iraq has canceled a multibillion-dollar contract with a Russian consortium to develop an oil field in southern Iraq, a major economic reversal there for Russia at a time when both Iraq and the United States have been courting Russian support in the event of war.

The Russian giant Lukoil, which leads the group tapped to develop the massive West Qurna oil field, announced the cancellation today, saying it had received a letter on Monday from a deputy Iraqi oil minister breaking the $3.5 billion, 23-year contract. Two other Russian companies, state-owned Zarubezhneft and Machinoimport, are part of the consortium.

A spokesman for Lukoil, Alexander Vasilenko, denounced the move as "blackmail" by Iraq and said the Russian firms would fight the decision. "We do not understand how a petty bureaucrat from Iraq's Oil Ministry can tear up a law that has been passed by the parliament of Iraq," Vasilenko told the Russian news agency Interfax.

"Lukoil will take all appropriate action to defend its rights," the company said in a statement.

The West Qurna deal is by far the most significant oil development project undertaken in Iraq by Russian companies, but it has been stalled from the start by continuing U.N. sanctions against the government of President Saddam Hussein. The Iraqis have pressured Lukoil to defy the sanctions and begin work, but it has refused.

The Iraqi government issued no official statement today on the canceled deal, but Oil Minister Amir Mohammad Rasheed seemed to suggest it was related to the inaction resulting from sanctions. "Any company that does not fulfill their obligation over a long time, then we will be free to cancel their contract," he told reporters in Vienna at a meeting of the Organization of Petroleum Exporting Countries. "This is the policy."

Russia has billions of dollars in economic ties to Iraq extending well beyond the oil sector, including as much as $12 billion in Cold War-era debt it hopes to collect. That debt is a reminder of the countries' close ties going back to when the Soviet Union cultivated Iraq as a key partner in the Arab world.

But those ties have assumed new urgency in recent months as Washington and Baghdad have competed for Russian support in the confrontation between Hussein and President Bush.

Until today's news, Iraq has mostly sought to placate Russia with reminders of their close economic relationship, and disclosed in late August that it planned to sign economic deals with Moscow worth up to $40 billion. At the same time, the United States has tried to allay Russian concerns that it would lose out economically in a post-Hussein Iraq. Most recently, Bush told a Russian television interviewer that in the event Hussein were ousted, Russia's "economic interests in Iraq . . . will be taken into account."

The Russians seem to have been satisfied by U.S. arguments -- to a point. For months, they balked at U.S. demands that the Iraqis submit to a new round of U.N. weapons inspections or face being attacked. But after insisting on wording changes to a new U.N. resolution, Russia voted with the United States in the Security Council on the measure.

Iraqis work on a pumping station at an oil field in the town of Qurna, in southern Iraq. The project was part of a $3.5 billion deal with a Russian consortium. Iraq's oil minister suggested the cancellation of the contract was related to inaction resulting from U.N. sanctions.