A deal that will see French carmaker Peugeot return to the Iranian market will be signed Thursday as Iranian President Hassan Rouhani visits France, a French government source said.

Peugeot and its French partner Citroen will work with Iran's Khodro to produce 200,000 vehicles a year using parts manufactured in Iran.

The first vehicles will roll off the production line in 2017, the source said.

Peugeot pulled out of Iran in 2012 as Western sanctions imposed over the Islamic Republic's nuclear programme began to bite.

At the time, Iran was Peugeot's second-largest market after France.

With the lifting of the sanctions, Iran has signed a raft of commercial deals and Rouhani is also expected to tie up an agreement to buy passenger jets during his two-day visit to France.