Total, the last major western energy group in Iran, has a memorandum of understanding with state-owned National Iranian Oil Company to develop gas fields in the south of the country, together with Malaysia's Petronas oil company.
But the French government, concerned about Iran's nuclear programme, has urged Total not to invest.
'Not a crippling blow'
"Iran is an important country in our strategy and will continue to be ... But conditions need to change."
Total's announcement was "a blow, but it won't cripple Iran's energy industry," Sadegh Zibakalam, a professor at the University of Tehran, told Al Jazeera. Iran has become used to the pulling out of various western countries, he added.
In May, Royal Dutch Shell and Spain's Repsol YPF pulled out of developing Iran's vast South Pars gas field.
No western oil company has definitively said no to future investments in the country, but Iran is now unlikely to significantly raise its gas exports until after 2015.
Iran will likely shift its focus towards building relationships with eastern countries like Japan, India and China, Zibakalam said.
Iran test fired several missiles on Wednesday and Thursday and warned the US and Israel that it was ready to retaliate for any attack over its disputed nuclear projects.
In response, US Senator Christopher Dodd, the chairman of the Senate Banking Committee, said he would move a bill through his panel aimed at toughening sanctions on the country.
Dodd said that the legislation aimed to dissuade investors from investing in companies that operate in Iran's oil sector, putting more pressure on Iran to abandon its nuclear programme.
The US also said on Wednesday that it was reviewing Norwegian oil and gas giant StatoilHydro's role in helping to develop Iranian natural gas to see if it violates a US sanctions law against Tehran.
William Burns, the US under secretary of state for political affairs, said StatoilHydro's business dealings in Iran required "a further serious review" to clarify whether the company was violating the Iran Sanctions Act (ISA), which was introduced during a tightening of US sanctions on Iran during the Clinton Administration in 1995.
The law was created to punish foreign companies that invested more than $20 million in Iran's oil or gas sectors.
The US has not so far punished foreign companies that appeared to have violated the ISA, as the US state department can waive action against firms, if doing so is deemed to be in their best interest.