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* Imports to recover as S. Korea, Japan to step up purchases
* May rise back to levels before European Union ban kicked in
* Shipments recover as Asian buyers work around EU embargo
By Meeyoung Cho and Nidhi Verma
SINGAPORE, Aug 21 (Reuters) - Asia's crude imports from Iran are set to recover in September to levels reached before a July 1 insurance ban by the European Union plunged trade with the Islamic Republic into uncertainty not seen in decades.
Top Asian buyers -- China, India, Japan and South Korea together take more than half of Iran's crude oil exports -- have worked around the European Union embargo, suggesting imports will stay at least around these levels for the rest of the year.
Refiners want to continue using the Iranian crude many of their plants are configured to process, as changes will need lengthy testing of new grades or cause an alteration in output.
"Iran was part of the staple diet," said Sushant Gupta of energy consultancy firm Wood Mackenzie.
"The refiners would want to keep their crude slate intact if they can as long as the economics works. We do see a recovery in Iranian crude imports into Asia in the fourth quarter."
The United States, the European Union, and other Western nations want to stop Iran's suspected pursuit of nuclear weapons using toughened sanctions on oil exports, a major source of income. Tehran says its nuclear program is peaceful.
The European Union insurance ban threw the decades-old oil shipping and trading system into disarray. EU insurers underwrite most maritime shipping, and insurers elsewhere have been unable to offer cover for the billions of dollars in claims that could stem from a spill.
The European Union ban halved Iran's exports to top Asian buyers in July from June's figure of 1.28 million barrels per day (bpd), sending buyers scrambling to work around the measure.
The recovery in September will be driven by Japan and South Korea, Iran's third- and fourth-biggest oil buyers respectively. After a two-month gap, South Korea will resume imports of up to 200,000 bpd from September.
Japan is also resuming imports after completely halting shipments in July. It is loading about 226,000 bpd in August, more than double the amount loaded in July. Oil usually takes around three weeks to journey from Iran to Japan, so these cargoes will be accounted as imports in August or September.
If Japan lifts around the same volume in September as it plans for August, the two will help Iranian shipments to Asia's top buyers rise close to 1 million bpd from 656,300 bpd in July, when only India and China imported from the Islamic Republic.
In all, Iran's crude exports dropped to about 1.1 million bpd in June and July from more than 2 million bpd at the start of the year, sources said. At current prices, that cut meant the loss of about $100 million a day in earnings for Iran.
Besides Japan and South Korea, Mangalore Refinery & Petrochemicals Ltd., India's biggest state-owned buyer of Iranian oil, expects shipments to recover from October after it completes a facility that allows the use of bigger vessels. The company's loading plan for September is still not known, but it plans to lift about 2 million barrels in August.
Indian Oil Corp., the country's biggest oil refiner, also aims to lift a cargo in September. It had last imported Iranian oil in May.
Taiwan, a smaller buyer with just 22,000 bpd, also aims to resume buying from Tehran in September after a gap of six months.
Still, the recovery will not return Iran's exports to last year's levels, as buyers have to ensure they have cut shipments sufficiently to stay eligible for a waiver from the sanctions imposed by the United States. Washington has given waivers to the top four Asian buyers that come up for renewal later this year.
Even after the resumption, Japan's purchases will be about 25 percent lower than a year ago, while those by South Korea will about 20 percent less. Though India's MRPL is able to raise imports because of its new facility, it plans to cut shipments by 20 percent this year.
China, Iran's top oil customer and trading partner, has nominated full contract volumes of Iranian crude for loading this month, at just over 16 million barrels. It may stick to a similar lifting plan for September as its imports in the first seven months were down 22 percent from a year ago.
"Imports will not rise back to the pre-crisis levels," said Gupta at Wood Mackenzie. "But we expect to see a recovery, unless there are some fresh sanctions announced."
South Korea joined its Chinese counterparts by asking Iran to deliver crude on Iranian tankers, government and industry sources said. This shifts to Tehran the responsibility for insurance, sidestepping the EU ban.
Indian refiners have adopted a twin plan to deal with the insurance issue. They are seeking government approval to ask Tehran to deliver the oil, and are trying to use limited cover from state-run insurers for locally-owned tankers to ship it.
Iran has a major interest in keeping its crude flowing to South Korea, China, India and Japan because they are its top four customers, taking more than half of its oil exports.
Japanese refiners have secured government-backed insurance cover for locally owned tankers to ship Iranian crude. (Additional reporting by Osamu Tsukimori in Tokyo, Chen Aizhu and Judy Hua in Beijing, Florence Tan, Lee Yen Nee and Elizabeth Law; Writing by Manash Goswami; Editing by Clarence Fernandez)