UPDATE 2-As rial plunges, US Congress looks at expanding Iran sanctions

* Sanctions mulled for more Iran central bank transactions

* Aimed at pressuring Iran to abandon nuclear program

* Looking at ways to freeze reserves held outside Iran

* Senator Menendez will seek action after Nov. 6 election

(Recasts with comments from Menendez)

By Roberta Rampton

WASHINGTON, Oct 5 (Reuters) - U.S. lawmakers are consideringexpanding American economic sanctions on Iran - measures thatalready have helped push that country's currency into free fallbut have not yet convinced Tehran to abandon its nuclearprogram.

Democratic Senator Robert Menendez, a member of the SenateBanking and Foreign Relations Committees, said he plans to pushfor new penalties on foreign banks that handle any significanttransactions with the central bank of Iran. Only oil-relatedtransactions are now covered by sanctions.

A senior House of Representatives Democrat, Howard Berman,is working on additional possible sanctions on Iran.

Menendez said he is also looking at ways to freeze anestimated 30 percent of Iran's foreign currency reserves held inbanks outside the country.

"It seems to me we have to completely exhaust all the toolsin our sanctions arsenal, and do so quickly, before Iran finds away to navigate out of its current crisis," Menendez said in aninterview.

Iran's economy has been badly hit by U.S. and Europeansanctions imposed to try to pressure the Iranian leadership tostop pursuing nuclear weapons. The Iranian rial currency haslost a third of its value against the dollar in the past 10 daysand as much as 80 percent since the beginning of the year.

Iran says its nuclear program is for peaceful purposes.

The U.S. Congress is out of session until after the Nov. 6presidential election, meaning any action on fresh sanctionswill have to wait until then.

Menendez said he hopes the additional sanctions will becomepart of an annual defense policy bill that the Senate and Housemust finalize after the election.

An aide to Berman said the congressman - the top Democrat onthe House Committee on Foreign Affairs - is working on measuressimilar to the Menendez proposal. The Senate is controlled byDemocrats and the House by Republicans.

In Britain on Friday, U.S. Treasury Department officialDavid Cohen said Iran has the ability to "relieve the pressureits people are feeling" by resolving concerns over its nuclearwork. He blamed the rial's plunge on Iran's own economicmismanagement as well as sanctions.

The White House had no immediate comment on possible newsanctions.


The rial's plunge and signs of civil unrest in Tehran havegiven Western policymakers hope that economic sanctions may bebiting deeper.

Time is running short to do more, Menendez said. "Sanctionsare working, but we aren't sure they will work quickly enough toforce Iran to put its nuclear program on the table," he said.

The stakes are high. Israeli Prime Minister BenjaminNetanyahu last week suggested Israel might use military forceagainst Iran if its uranium enrichment program passes what hetermed a "red line."

The European Union is discussing its own possible broadtrade embargo against Iran that would include sweeping measuresagainst the central bank and energy industry.

Striking a more cautious tone, U.N. chief Ban Ki-moon saidon Friday international sanctions are hurting Iran's people andmay harm humanitarian operations in the country.

Western powers must make sure diplomacy is a central part ofthe process for resolving the nuclear issues rather than simplyturning up the sanctions pressure, said George Lopez, aprofessor of peace studies at Notre Dame University in Indiana.

"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.

Menendez said in the interview on Friday that lawmakers haveheld only "some preliminary conversations" with the Obamaadministration on the proposals.

"I would think that the administration would welcome theseas a way in which we get to our common goal, which is to ensurethat Iran doesn't acquire nuclear weapons," he said.

Some lawmakers want the extended sanctions to cover alltransactions except for those involving food and medicine, saida senior congressional aide, speaking on condition of anonymity.

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

The United States has long barred U.S. firms from doingbusiness with Iran, and last December adopted measures to forceinternational buyers of Iranian oil to cut their purchases.

The United States has given major buyers of Iranian oilsix-month waivers of the rules as long as they are making"significant" cuts. As those waivers come up for renewal, theU.S. government needs to ensure it asks for even bigger cuts inIranian oil purchases, Menendez said.

"We must make it clear - this is a big must - that absentsome extraordinary circumstance, that we will not grant waiversto any nation that doesn't make our reduction benchmarks," hesaid.

(Additional reporting by Timothy Gardner; Editing by KareyWutkowski and Will Dunham)


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