The firm denies any wrongdoing, but in a filing with the Securities and Exchange Commission on Monday, acknowledges that a grand jury is investigating its possible dealings with Iran through a Cayman Islands subsidiary.
"This is the biggest scandal to hit Halliburton," said Senator Frank Lautenberg. "This could result in felony charges, because it is illegal to do business with a terrorist state, particularly Iran."
Once headed by US Vice-President Dick Cheney, Halliburton is already under a cloud for cornering massive contracts in Iraq. Critics say the firm was rewarded for its ties with the Bush administration.
The firm is also being probed for over-pricing meals it has been contracted to supply to US troops in Iraq.
"We have a Cayman Islands subsidiary with operations in Iran and other European subsidiaries that manufacture goods destined for Iran and render services in Iran," Halliburton vice-president Margaret Carriere acknowledged in the filing.
"This could result in felony charges, because it is illegal to do business with a terrorist state, particularly Iran"
She said the company received a grand jury subpoena this month requesting documents related to the operations, the nature of which remains undisclosed.
US law bars US-incorporated entities, citizens and residents from engaging in commercial and financial transactions with Iran.
But Carriere said the company had done nothing wrong.
"We completed a study in 2003 of our activities in Iran during 2002 and 2003 and concluded that these activities were in full compliance with applicable sanction regulations," she said.
A loophole in the law apparently allows US firms to circumvent the sanctions through foreign-based subsidiaries if their dealings are not directly managed by US citizens or from US soil, according to legal experts.
Cheney was chairman of Halliburton from 1995 until his selection as George Bush's running mate in the 2000 presidential race.