By Nandita Bose and Yomna Ehab
WASHINGTON/DUBAI, June 18 (Reuters) - Oil tankers sailed through the Strait of Hormuz and the United States said it lifted its blockade on Iran on Thursday as an interim deal to end the war took effect, though key issues are still unresolved between the two countries.
Oil prices dropped to their lowest level since the war began on February 28, as analysts said exports through the strait, which handles about one-fifth of global oil supply, could return to normal in the coming months.
But Israel continued its war against Hezbollah in Lebanon, raising questions about whether the agreement would hold.
In Washington, some of President Donald Trump's Republican allies in Congress questioned whether he had given up too much in order to end the conflict, which is unpopular with U.S. voters.
Iran's Supreme Leader Ayatollah Mojtaba Khamenei said Trump signed the deal "out of desperation" and signaled that upcoming talks over Iran's nuclear program - Trump's stated reason for starting the war - would not be easy.
"If the American side wants to be too demanding, we will not accept it," he said in a written message.
The deal gives negotiators 60 days to reach agreement on the status of Iran's nuclear program, and set up a $300 billion reconstruction fund for Iran and other financial incentives. U.S. Vice President JD Vance, who will lead the U.S. delegation, said Washington will also seek to limit Tehran's long-range missiles.
When he launched the war nearly four months ago, Trump said he aimed to destroy Iran's nuclear weapons program, end its ability to strike its neighbours, prevent it from supporting allied militants in the region and make it possible for Iranians to topple their hardline leaders.
Though he initially demanded Iran's "unconditional surrender," Trump ultimately signed the agreement with none of those objectives met.
U.S. officials say the negotiations could still yield a strong agreement on Iran's nuclear program. But critics say Iran is in a stronger position now, having withstood a superpower attack, exerted control of the Strait of Hormuz and gained valuable waivers to financial sanctions.
Iran signaled it will still exert control over the strait, saying it will issue permits and direct traffic during the 60-day period, though no fees will be charged during that time.
TRUMP, VANCE WARN ISRAEL
But in Lebanon, where more than a million people are displaced by the fighting, Israeli forces launched fresh airstrikes early on Thursday, raising doubt about how far Trump will go to force his wartime allies to halt an offensive he has now pledged to end.
Trump said he expects a complete ceasefire on all fronts. "The United States is committed to PEACE, and we encourage everyone in the Middle East Region to maintain their commitment to allowing our negotiations to beautifully unfold," he said on social media.
The deal calls for the "permanent termination" of the war in Lebanon and for its "territorial integrity and sovereignty" to be ensured.
Israel, which was not part of the negotiations, has said it has no intention of withdrawing from Lebanon and released a new map showing an expanded occupation zone.
Trump has become openly critical of Israel's operations in Lebanon, leading to one of the biggest rifts between the two countries in decades.
Vance warned Israel to respect the peace process.
"If I was in the cabinet of the Israeli government, I might not be attacking the only powerful ally that I have anywhere left in the entire world," he said at the White House.
(Reporting by Reuters bureaus, Writing by Andy Sullivan, Peter Graff and Jon Boyle; Editing by William Maclean, Daniel Wallis and Sanjeev Miglani)
