Iran blames economic "conspiracy" as criticism grows

(Reuters) - Iran will defeat a "conspiracy" against its foreign currency and gold markets, an adviser to supreme leader Ayatollah Ali Khamenei said on Friday, with pressure mounting on the authorities to deal with the rapid collapse of the rial.

Riot police fought demonstrators and arrested money changers in and around the Tehran bazaar on Wednesday during protests triggered by the fall of the Iranian currency, which has lost a third of its value against the dollar over the last ten days.

Protesters called President Mahmoud Ahmadinejad a traitor because of what many say is his serious mismanagement of the economy, which has been badly hit by U.S. and European sanctions imposed over Iran's nuclear programme.

There has so far been no public criticism of Khamenei, the Islamic Republic's most powerful authority.

"Iran is overcoming the psychological war and conspiracy that the enemy has brought to the currency and gold market and this war is constantly fluctuating," said close Khamenei ally Gholam Ali Haddad Adel, according to Fars news agency.

"The arrogant powers...think the nation of Iran is ready to let go of the Islamic revolution through economic pressure but we are establishing Iran's economic strength," he said.

Iranian media reported harsh words for Ahmadinejad's government at Friday prayer sermons across the country.

"In my view only a small percentage of the economic problems and inflation is related to the enemy sanctions and the main reason is the erroneous economic policies," said Ayatollah Seyed Yousef Tabatabai-Nejad in Esfahan, Mehr news agency reported.

"The day you took the votes.... did you know this country and its people are revolutionary?" Fars news reported Ayatollah Ahmad Alhoda as saying in apparent reference to Ahmadinejad.

"If you knew that you can't confront these problems and crises but told people you can, you have undoubtedly betrayed their rights."

Washington says the fall in the rial over the past year has been caused by both economic mismanagement and sanctions, which the administration of President Barack Obama and the European Union tightened sharply this year.

Iran's leadership could "relieve the pressure its people are feeling" if it resolves concerns about its nuclear work, David Cohen, undersecretary for terrorism and financial intelligence at the U.S. Treasury, said in London.

Aides to senior U.S. lawmakers said on Friday they were looking at even more drastic sanctions to isolate Iran from the international financial system.

Most of Tehran's bazaar was shut on Thursday, but business associations said it would reopen on Saturday under the supervision of the security forces. It is traditionally closed on Fridays. Analysts say any further discontent could spread quickly if it is allowed to gain a foothold.

The bazaar, whose merchants were influential in bringing an end to Iran's monarchy in 1979, wields significant influence and this week's unrest is a clear signal that the economic hardship is having a profound effect on businessmen and residents alike.

"EVERYTHING SO EXPENSIVE"

"I have a good salary and I can still afford the shopping and expenses for my family. But everything has become so expensive and so difficult for people. I'm just glad I have a job," Ali, a 42-year-old Iranian engineer, told Reuters by telephone. He earns $1,000 a month.

This week's currency plunge has so far had a small but noticeable impact on prices of groceries, and Ali fears more rises are imminent.

"Eggs, milk, cheese, infant formula, cooking oil, rice and beans have all increased over the last six days," Kia, a Tehran-based blogger, wrote in an email.

"I've seen people buying lots of food and some of them are stockpiling," said Kia, alluding to further rises on the way.

The cost of food and fuel has shot up in the last year as rampant inflation has taken hold. Iranians now pay nearly three times more for chicken and red meat than a year ago.

Farmers say they are forced to pass on the increased costs of animal feed and vaccines, which are often imported and directly affected by the fluctuations in the exchange rate.

The rial's losses have accelerated despite the government's attempts to stem the slide by setting up an "exchange centre" designed to supply dollars to importers of some basic goods at a special rate, slightly cheaper than the market rate.

Instead of allaying fears, the centre seems to have intensified the race for hard currency.

"This is a very serious situation. There is a lot of pressure on Khamenei to remove Ahmadinejad but they will need to find a way to do it without losing face," said Iranian-born Mehrdad Emami, an economics adviser to the European Union.

"Ahmadinejad is pushing ahead and that could create continuing unrest which will need a lot of security on the streets," he added.

(Additional reporting by William Maclean; Editing by Peter Graff)