* More sanctions on Iran being prepared in Europe
* Governments weigh costs and benefits of trade embargo
* New steps expected by Oct. 15
By Justyna Pawlak
BRUSSELS, Oct 5 (Reuters) - The European Union has begun discussing the possibility of a broad trade embargo against Iran, moving beyond the web of energy, business and financial restrictions imposed so far, in an effort to pressure Tehran not to build nuclear weapons.
Talks are advancing with extreme caution because of European governments' traditional reluctance to impose measures that increase pain on a country's citizens rather than on their government.
"General sanctions on trade are still taboo," said one EU diplomat.
But there is frustration over the failure of diplomacy this year to force Iran to scale back its nuclear programme.
"There is a debate about a trade embargo," said one EU diplomat in Brussels. "Many countries are not eager to impose a general embargo. But the debate exists."
Some states fear too-aggressive moves could backfire and rally the population behind President Mahmoud Ahmadinejad.
But sanctions advocates argue the anti-government protests in Iran this week over the collapse of the rial show that further measures could turn more people against the government.
"Sanctions were designed to put the regime to a choice between an atomic weapon and its political survival ... Let's turn the sanctions dial up to ten and see how strong (its) nuclear resolve really is," said Mark Dubowitz, the head of the non-profit group Foundation for Defense of Democracies.
An extensive European trade embargo against Iran, similar to restrictions put in place already by Washington, is still far off if not impossible, EU diplomats say.
Many capitals, led largely by Sweden, openly insist on limiting economic pressure on the Iranians.
But a new package being prepared by EU governments this month includes sweeping measures against the central bank and energy industry which, if fully implemented, could drastically reduce Europe's trade with Iran.
Several countries, including EU heavyweight Britain, are seeking new steps such as a blanket ban on financial transactions, though with a system of licences to keep essential goods flowing into Iran, and prohibitions against any energy-related trade. The Netherlands is another strong advocate of trade sanctions.
European diplomats say only some elements of the package are likely to win the approval of all EU governments by the time foreign ministers meet on Oct. 15 to agree new sanctions.
One measure, a plan to ban the import of natural gas from Iran to Europe, already has the backing of EU member states. Others are still being debated.
More sanctions are also being prepared in Washington and tensions between Iran and Israel are rising, threatening a new war in the Middle East. Tehran denies its nuclear work has any military dimensions.
The EU has gradually increased economic pressure against Tehran over the last two years, culminating in an embargo on Iranian oil put in place in July.
"There is a strong allergic reaction among the Europeans to the idea of a full trade embargo," Dubowitz said.
"But it is possible to move towards a full embargo, without having announced one."
Some diplomats are pushing for a ban on European governments or companies extending short-term guarantees on trade with Iran.
There are also proposals to ban exports of some metals and graphite, a mineral used in steel-making, to Iran, diplomats said, and to prohibit European companies from registering Iranian tankers under their flags.
Trade has fallen significantly this year, with imports nearly halving in the first six months, compared to 2011, and exports down by a third, according to Eurostat. Still, European importers bought Iranian goods worth more than 4 billion euros ($5.16 billion) between January and June.
"Some countries want to put pressure on legitimate trade. They want loopholes closed completely," said one EU diplomat.
(Additional reporting by Phil Blenkinsop; Editing by Andrew Roche)
((Justyna.Pawlak@thomsonreuters.com)(+32 2 287 6853 x82853))
Keywords: EU IRAN/SANCTIONS TRADE