* Plunge of rial triggered street protests
* Heavy police presence as bazaar reopens
* Rial dealers unwilling to accept state-mandated rate
* U.S. says more international sanctions possible
(Adds U.S. comments, paragraphs 17-19)
By Andrew Torchia and Yeganeh Torbati
DUBAI, Oct 6 (Reuters) - Tehran's Grand Bazaar reopened under close police supervision on Saturday, traders said, days after it was shut by clashes between riot police and protesters blaming the government for the collapse of the Iranian currency.
Iran's government remained locked in a test of wills with currency dealers as it tried unsuccessfully to impose a stronger exchange rate for the rial, which lost about a third of its value in 10 days.
Merchants in the bazaar, one of the capital's main shopping areas, said uncertainty over whether authorities could stabilise the currency was making business planning difficult.
"The dominant thing on every merchant's mind is concern for tomorrow," one shop owner told Reuters by telephone, declining to be named because of the political sensitivity of speaking to foreign media.
On Wednesday, riot police fired tear gas, fought demonstrators and arrested money changers in and around the bazaar. President Mahmoud Ahmadinejad blamed speculators for the rial's slide, which is eating into living standards and destroying jobs in the industrial sector.
The involvement of the Grand Bazaar in the protests is politically significant because merchants from the area were key supporters of Iran's Islamic revolution in 1979. Some traders said they shut their shops this week as part of the protests, while others cited fears over their safety.
The rial has been undermined by Western sanctions against Iran over its disputed nuclear programme, but many Iranians also blame economic mismanagement by Ahmadinejad's administration.
After the protests, most free market trade of the rial in Tehran and Dubai, a major centre for business with Iran, ground to a halt because dealers feared being targeted by police for quoting rates that displeased the government, and because of the huge financial risks of trading such a volatile currency.
Authorities attempted to revive trade on Saturday by dictating a rate. The Iranian Money Changers Association, a state-licenced body, instructed its members to sell dollars at 28,500 rials, Mehr news agency quoted a trader as saying. That was much stronger than the record low of 37,500 early this week.
But dealers in Tehran and Dubai told Reuters there was almost no trade because the rates indicated by state bodies were not commonly accepted in the market.
Money changers in Tehran "tell us not even to call them to ask the price of currency. They say they are not giving rates," a merchant in the capital said.
The website of SarafiJalali.com, a Tehran-based money changer, said that to comply with the policies of the central bank, it had stopped announcing rates. The firm said it hoped to resume quoting the rial in the future with the permission of the central bank, but did not elaborate.
If the currency market stays frozen, many Iranians may become unable to conduct businesses that involve imports, while foreign travel and study abroad may be curtailed. This could increase discontent with the government.
Some analysts believe that despite the sanctions, which have slashed Iran's oil earnings, the government still has enough foreign currency to flood the free market with dollars and engineer a sharp rebound of the rial if it chooses.
At the end of last year, Iran's official foreign reserves totalled $106 billion, according to the International Monetary Fund. Analysts estimate reserves may now have dropped by several tens of billions of dollars, but that would still allow Iran to pay for roughly a year of merchandise imports.
So far however, the central bank has been unwilling to release large amounts of dollars into the market to support the rial. Instead, authorities have been rationing hard currency through official channels such as a new foreign exchange centre, which was set up last month to serve importers of basic goods.
U.S. Defense Secretary Leon Panetta on Saturday said the international community will impose more economic sanctions on Iran if the country does not resolve concerns over its nuclear programme. The West accuses Iran of developing nuclear weapons. Iran says its nuclear programme is for peaceful purposes.
Existing sanctions "are having a significant impact on the economy in Iran, as evidenced by some of the demonstrations that have taken place within the last few days," Panetta told a news conference in Lima with Peru's defense minister.
"The United States will continue to work with the other countries in the international community to see if additional steps need to be taken," Panetta added.
Ordinary Iranians have rushed to convert their savings into dollars to escape the rial's depreciation and avoid high inflation, which the government says is running at about 25 percent but private economists put much higher.
Although staple foods and basic consumer goods produced domestically are still generally available, the volatility of the rial and prices has in the past few weeks begun to make some foreign products unavailable, Tehran residents told Reuters.
A seller of imported personal computer equipment told Reuters by phone he had halted sales because he could no longer calculate what his products were worth in rials.
In a report to the U.N. General Assembly that was released on Friday, U.N. chief Ban Ki-moon said the sanctions were having a "significant" effect on Iran's people and also seemed to be harming humanitarian operations in the country.
Unless Iran allows more international monitoring of its nuclear programme, its economic pain looks unlikely to prompt Western governments to ease the sanctions, and it may even encourage them to take further steps.
U.S. lawmakers are considering expanding American economic sanctions on Iran. Democratic Senator Robert Menendez, a member of the Senate Banking and Foreign Relations Committees, said he plans to push for new penalties on foreign banks that handle any significant transactions with Iran's central bank. Only oil-related transactions are now covered by sanctions.
The European Union also has begun discussing the possibility of a broad trade embargo against Iran, moving beyond the energy, business and financial restrictions imposed so far.
(Reporting by Marcus George and Yeganeh Torbati in Dubai, and Zahra Hosseinian in Zurich; Editing by Jon Hemming)
Keywords: IRAN ECONOMY/