India-based Essar Group closed its purchase of the Minnesota Steel Industries plant in Nashwauk earlier this week.
After arriving back in Minnesota Saturday from his trade mission to India, the governor told reporters that Minnesota will not provide financial assistance to any company that does business with what he called "terrorist states."
Pawlenty said he is working with the federal government to confirm reports that Essar has ties to Iran and hopes to have answers soon.
"Now that Essar owns the company, these questions have to be addressed and resolved to the full satisfaction of the United States government and me," he said. "Otherwise we will strongly oppose any additional assistance or efforts by this company to go forward with this project in Minnesota."
Pawlenty said that no state money has gone to Minnesota Steel since Essar bought the company.
"The state of Minnesota is not going to be in a position, under my watch at least, of supporting companies that are engaged in any kind of inappropriate activities with the country of Iran, which is a terrorist state, when we are at war," he said.
The project could start early next year. It is expected to provide about 2,000 construction jobs and result in a mine and plant with 700 full-time workers. The plan is to produce 1.5 million tons of steel starting in 2009 and eventually increase production to 2.5 million tons per year.
News of the plans for the $1.6 billion steel mill was had bouyed local officials in the Nashwauk area, where ore was last mined more than 20 years ago.
Nashwauk Mayor William Hendricks said Saturday afternoon he was stunned and disappointed to hear the governor's announcement.
"We were very upbeat yesterday, and about an hour ago I got a call from the governor's office. He told me, he said 'I want to let you know that it's of big concern,'" Hendricks said.
The mayor said the news is not easy for the town to swallow. But he said it is too soon to know what will happen with the project.
He said he is reserving final judgement until the facts are all in.