By Liz Hampton and Marianna Parraga

HOUSTON, Dec 15 (Reuters) - Sellers of a new grade of Iraqi oil are competing fiercely to win market share on the U.S. Gulf Coast, though high sulfur content has limited appeal for refiners of the crude, known as Basra Heavy.

Iraq's State Oil Marketing Organization (SOMO) began selling the crude with an API gravity of about 23 degrees in May after separating it from the Basra Light stream to resolve quality and consistency issues and reach new customers.

The first shipments of Basra Heavy to the U.S. Gulf Coast were modest. They peaked in October at nearly 2.5 million barrels, then plunged 80 percent in November. December arrivals have also been low, according to Reuters vessel tracking data.

Other volumes arrived since May on vessels carrying 11.7 million barrels of Basra Heavy and Basra Light in segregated hulls that went to refiners including Exxon Mobil , Chevron Corp. , Marathon Petroleum and Valero Energy .

Shipments from these so-called co-loaded vessels also fell by half to 1 million barrels in November from October, according to tracking data.

A source at another U.S. refiner said his company bought a test cargo a couple of months ago, but made no additional purchases because of quality concerns about the grade whose sulfur content exceeds 4 percent.

Sales dropped off even though SOMO trimmed its Official Selling Price for Basra Heavy to the United States several times to win customers. Its discount to the sour crude index has grown to $6.25 a barrel from $3.90 in September. Traders estimate that Basra Heavy is aggressively priced several dollars below Western Canadian Select, a competing North American grade.

Introduction of Basra Heavy initially concerned suppliers of Latin American heavy grades seeking to guard their U.S. market share, traders and producers said. But those worries have waned.

A source at another U.S. refiner said his company bought a test cargo a couple of months ago, but made no additional purchases because of quality concerns about the grade whose sulfur content exceeds 4 percent.

Some refiners are still attracted to the crude because of its price, but they are blending it at the refinery to bring it to an acceptable specification, traders said.

Because buyers do not want entire tankers with 2 million barrels of Basra Heavy, smaller vessels deliver batches after ship-to-ship transfers that add costs for sellers.

A similar pattern exists in Asia.

But for producers of some Latin American heavy and medium blends, more competition is forcing spot sellers to give deeper discounts, according to sources.

Still, buyers say West African heavier crudes are more likely to be pushed out of the U.S. market by the new Iraqi grade than popular Latin American ones.

(Reporting by Liz Hampton and Marianna Parraga; Additional reporting by Florence Tan in Singapore; Editing by Terry Wade and David Gregorio) ((Liz.Hampton@thomsonreuters.com; +1-713-210-8522; Reuters Messaging: Reuters Messaging: liz.hampton.reuters@reuters.net))

Keywords: OIL USA/IRAQ