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Ecuador on Thursday dismissed a legal challenge to its seizure of $1bn (€780m, £530m) of assets belonging to Occidental, after the US oil company filed an arbitration claim against the Andean country.

On Monday, the government of President Alfredo Palacio revoked Occidental’s operating contract when the energy ministry determined the company had improperly transferred a 40 per cent interest in its fields to EnCana of Canada in 2000.

Occidental, which was the largest foreign investor in Ecuador, filed a claim at the International Centre for Settlement of Investment Disputes in Washington on Wednesday. The company is demanding the court restore its rights and prevent the government from allowing another foreign investor to operate its oil facilities until the dispute is resolved, a process that could take more than a year.

“Occidental intends to vigorously pursue redress for damages resulting from Ecuador’s illegal seizure,” the company said.

But Enrique Proaño, the government’s senior spokesman, shrugged off the challenge. “This claim has no basis because Ecuador has applied the law,” he said.

There is widespread concern within Ecuador about the damaging effect the government’s action has had on the country’s relationship with Washington. The Bush administration suspended trade talks with Ecuador on Tuesday in response to the move, which it said “appears to constitute a seizure of the assets of a US company”.

Ecuador reacted angrily. “The US government has assumed as its own a problem between the Ecuadorean state and a US company,” said Diego Borga, finance minister. “It is not possible that on the one hand it pushes a trade negotiation and on the other hand seeks to interfere politically in an internal matter. This is unacceptable.”

Rob Portman, the outgoing US trade representative, said the seizure was “unfortunate”, but was keen to stress that Washington still hoped to strike a trade deal with Quito.

“We are very eager to engage with Ecuador but it’s difficult to engage while they are taking certain actions with regard to legitimate US investment,” Mr Portman said.

Ecuador was on Thursday still trying to come to terms with how to operate Occidental’s installations, which were transferred to them on Tuesday. Petroecuador, the state oil company, was due to take over the facilities officially on Thursday after Occidental reportedly told workers it was no longer employing them.

“We still don’t have a strategy to follow,” said Fernando González, president of Petroecuador, adding that he was analysing “whether to pick a partner, hold an international auction or if Petroecuador should continue operating”.

The latter option is unlikely, given that the state company is woefully indebted and lacks basic cashflow. Petroecuador is thought to be looking at a list of potential partners including South American state oil companies from Brazil and Venezuela and possibly Chinese companies. Andean Petroleum Company, a consortium of two Chinese state-owned companies, bought EnCana’s assets last year for $1.4bn, the biggest transaction in the history of Ecuador’s oil sector.

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