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UPDATE 1-Iran blames economic "conspiracy" as price rises loom

* Iran will defeat "conspiracy" against the rial, aide says

* Currency has collapsed in past week

* More price rises feared when Tehran bazaar reopens

(Adds quotes, background) By Marcus George

DUBAI, Oct 5 (Reuters) - Iran will defeat a "conspiracy" against its foreign currency and gold markets, an adviser to supreme leader Ayatollah Ali Khamenei said on Friday, as pressure mounts on 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 week.

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

But 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," Gholam Ali Haddad Adel, an adviser to Khamenei, said in a report by the semi-official Fars news agency.

"The arrogant powers, in their crude way, think that 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.

Haddad Adel is an ally of Khamenei and father-in-law to his son Mojtaba.

Ayatollah Ahmad Khatami, a hardline cleric, called on the various branches of government to work together to solve the country's economic problems.

"It is expected that the authorities should solve the problems with empathy. Treating the pain will solve the problem, not apportioning blame," he said in a sermon at Friday prayers.

Most of the 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," Ali, 42-year-old Iranian engineer, told Reuters by telephone. He earns $1,000 a month.

"But everything has become so expensive and so difficult for people. I'm just glad I have a job."

This week's plunge in the rial has not yet made groceries more expensive, says Ali, but he fears more price rises are around the corner.

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 about the availability of dollars, the centre seems to have intensified the race for hard currency.

Despite this, there is no indication that the government will back down from its policies, which analysts say will leave Khamenei with the dilemma of backing Ahmadinejad or blaming him.

"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. Otherwise it will have to back him with force," 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.

Iran's leaders could stabilise and possibly strengthen the rial if they take the right decisions, say analysts. The country had $106 billion of foreign currency reserves at the end of last year, according to the International Monetary Fund.

Even if these reserves have now fallen by tens of billions of dollars, there are still enough petro-dollars left to prop up the market and boost the rial if the government chose to do so.

"The drop of the rial is completely related to politics and psychology. Iran has more than enough foreign exchange to defend its currency," said Mohammad Ali Shabani, a London-based Iranian political analyst.

(Reporting by Marcus George; Editing by Giles Elgood)

((marcus.george@thomsonreuters.com)(+971 56 655 2056))

Keywords: IRAN ECONOMY