An explosion has set an Iranian oil tanker on fire near the Saudi port city of Jeddah according to local reports on Friday.

It is understood the tanker is the Sabiti oil tanker, which is owned by the National Iranian Oil Company, with the vessel reportedly on fire 60 miles from the Saudi port city of Jeddah.

Early reports incorrectly identified the vessel as the NIOC-owned Sinopa.

The explosion has caused heavy damages and oil is spilling in the Red Sea, unnamed sources told Iran's Students News Agency ISNA, which also cited experts as saying they believed it to be a terrorist attack.

It was later reported by Iranian state TV that two missiles had struck the tanker, causing the blaze.

"Two missiles hit the Iran-owned ship near the Jeddah port city of Saudi Arabia," state TV said, quoting the National Iranian Oil Company.

Iranian state news agency IRNA said later on Friday: "The leak of oil has stopped and the situation is under control."