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UPDATE 1-As rial plunges, US Congress looks at expanding Iran sanctions

* May apply sanctions on Iran central bank transactions

* Aimed at pressuring Iran to rein in nuclear program

(Adds comments from analysts)

By Roberta Rampton

WASHINGTON, Oct 5 (Reuters) - Lawmakers in the U.S. Congressare looking at ways to expand economic sanctions on Iran,measures that have helped push the country's currency into freefall but have not yet pressured Tehran to abandon its nuclearprogram.

The proposals, still in the early stages of development,would aim to penalize foreign banks that handle any significanttransactions with the Central Bank of Iran. Only oil-relatedtransactions are now covered.

"We are seriously looking at additional policy options,including further closing the (Central Bank of Iran) totransactions and other measures designed to impact Iran foreigncurrency reserves," an aide to Democratic Senator RobertMenendez said on Friday.

Another congressional aide said some lawmakers believe thatif all banking transactions except for food and medicine werecovered, the Iranian economy would collapse "pretty quickly."

Menendez and Republican Senator Mark Kirk were co-authors ofa sanctions law passed in December that targeted revenues fromIran's oil sales as a way to stop it from pursuing nuclearweapons. Iran says its nuclear program is for peaceful purposes.

The plunge of the rial and signs of civil unrest in Tehranhave given Western policymakers hope that economic sanctions maybe biting deeper. The stakes are high, with Israeli PrimeMinister Benjamin Netanyahu last week suggesting Israel mightuse military force against Iran if its uranium enrichmentprogram passes what he termed a "red line."

Iran has blamed the plunge in the currency on what it saysis a foreign conspiracy.

The European Union has begun discussing the possibility ofits own broad trade embargo against Iran that would includesweeping measures against the central bank and energy industry.

But Western powers need to make sure diplomacy is a centralpart of the process for resolving the nuclear issues, ratherthan simply turning up the sanctions pressure, said GeorgeLopez, peace studies professor at Notre Dame University.

"There's no guarantee that a government that's findingitself in collapse wants to negotiate a nuclear treaty, thosecan be the worst conditions," Lopez said.

The new U.S. congressional measures could become part of anannual defense policy bill, which the Senate and House ofRepresentatives need to finalize after the Nov. 6 presidentialelection, said a congressional aide, who spoke on condition ofanonymity.

"It's just a matter of tweaking the current law, veryslightly," the aide said.

TOTAL ECONOMIC COLLAPSE

Some lawmakers are pushing for all transactions except forthose involving food and medicine to be covered by the bankingsanctions, the aide said.

"You really move to a total embargo scenario," the aidesaid. "The Iranian economy would collapse pretty quickly."

At a minimum, the aide said a proposal could be revived toblock any company from U.S. financial markets if it does anytype of business with any type of Iranian energy firm. That planhad been floated earlier this year.

The United States has long barred U.S. firms from doingbusiness with Iran, but last December adopted measures thatforced international buyers of Iranian oil to cut theirpurchases.

In August, a second package of sanctions added morerestrictions for international banks, insurance companies andoil traders.

As part of that law, the government is required to reportnext week on Iran's natural gas production and exports,including the impact a reduction in exports would have on globalnatural gas prices.

In December, the administration is required to tell Congresswhether Iranian exports of natural gas could be sanctioned underexisting laws and what the impact of those sanctions would be.

Suzanne Maloney, an expert on Iran at the BrookingsInstitution, said she thinks the Obama administration wouldsupport new measures as "a reminder to Tehran that the country'splight can get worse."

But because Tehran still exports around a million barrels ofoil every day, the regime may have enough cash reserves to beable to ride out sanctions pressure for some time, Maloney said.

"The outcome is more likely to be the corrosion of theeconomy, rather than its outright collapse," she said.

(Additional reporting by Timothy Gardner; Editing by KareyWutkowski, Philip Barbara and Vicki Allen)

((roberta.rampton@thomsonreuters.com)(Twitter

@robertarampton)(+202 898 8390))

Keywords: IRAN USA/SANCTIONS