Wires

UPDATE 3-Iran blames economic "conspiracy" as criticism grows

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

* Currency has collapsed over the last ten days

* Friday sermons blame government for mismanagement

* Iranian fear further price rises in coming weeks

(Adds Friday sermons comments)

By Marcus George

DUBAI, Oct 5 (Reuters) - Iran will defeat a "conspiracy"against its foreign currency and gold markets, an adviser tosupreme leader Ayatollah Ali Khamenei said on Friday, withpressure mounting on the authorities to deal with the rapidcollapse of the rial.

Riot police fought demonstrators and arrested money changersin and around the Tehran bazaar on Wednesday during proteststriggered by the fall of the Iranian currency, which has lost athird of its value against the dollar over the last ten days.

Protesters called President Mahmoud Ahmadinejad a traitorbecause of what many say is his serious mismanagement of theeconomy, which has been badly hit by U.S. and European sanctionsimposed over Iran's nuclear programme.

There has so far been no public criticism of Khamenei, theIslamic Republic's most powerful authority.

"Iran is overcoming the psychological war and conspiracythat the enemy has brought to the currency and gold market andthis war is constantly fluctuating," said close Khamenei allyGholam Ali Haddad Adel, according to Fars news agency.

"The arrogant powers...think the nation of Iran is ready tolet go of the Islamic revolution through economic pressure butwe are establishing Iran's economic strength," he said.

Iranian media reported harsh words for Ahmadinejad'sgovernment at Friday prayer sermons across the country.

"In my view only a small percentage of the economic problemsand inflation is related to the enemy sanctions and the mainreason is the erroneous economic policies," said Ayatollah SeyedYousef Tabatabai-Nejad in Esfahan, Mehr news agency reported.

"The day you took the votes.... did you know this countryand its people are revolutionary?" Fars news reported AyatollahAhmad Alhoda as saying in apparent reference to Ahmadinejad.

"If you knew that you can't confront these problems andcrises but told people you can, you have undoubtedly betrayedtheir rights."

Washington says the fall in the rial over the past year hasbeen caused by both economic mismanagement and sanctions, whichthe administration of President Barack Obama and the EuropeanUnion tightened sharply this year.

Iran's leadership could "relieve the pressure its people arefeeling" if it resolves concerns about its nuclear work, DavidCohen, undersecretary for terrorism and financial intelligenceat the U.S. Treasury, said in London.

Aides to senior U.S. lawmakers said on Friday they werelooking at even more drastic sanctions to isolate Iran from theinternational financial system.

Most of Tehran's bazaar was shut on Thursday, but businessassociations said it would reopen on Saturday under thesupervision of the security forces. It is traditionally closedon Fridays. Analysts say any further discontent could spreadquickly if it is allowed to gain a foothold.

The bazaar, whose merchants were influential in bringing anend to Iran's monarchy in 1979, wields significant influence andthis week's unrest is a clear signal that the economic hardshipis having a profound effect on businessmen and residents alike.

"EVERYTHING SO EXPENSIVE"

"I have a good salary and I can still afford the shoppingand expenses for my family. But everything has become soexpensive and so difficult for people. I'm just glad I have ajob," Ali, a 42-year-old Iranian engineer, told Reuters bytelephone. He earns $1,000 a month.

This week's currency plunge has so far had a small butnoticeable impact on prices of groceries, and Ali fears morerises are imminent.

"Eggs, milk, cheese, infant formula, cooking oil, rice andbeans have all increased over the last six days," Kia, aTehran-based blogger, wrote in an email.

"I've seen people buying lots of food and some of them arestockpiling," said Kia, alluding to further rises on the way.

The cost of food and fuel has shot up in the last year asrampant inflation has taken hold. Iranians now pay nearly threetimes more for chicken and red meat than a year ago.

Farmers say they are forced to pass on the increased costsof animal feed and vaccines, which are often imported anddirectly affected by the fluctuations in the exchange rate.

The rial's losses have accelerated despite the government'sattempts to stem the slide by setting up an "exchange centre"designed to supply dollars to importers of some basic goods at aspecial rate, slightly cheaper than the market rate.

Instead of allaying fears, the centre seems to haveintensified the race for hard currency.

"This is a very serious situation. There is a lot ofpressure on Khamenei to remove Ahmadinejad but they will need tofind a way to do it without losing face," said Iranian-bornMehrdad Emami, an economics adviser to the European Union.

"Ahmadinejad is pushing ahead and that could createcontinuing unrest which will need a lot of security on thestreets," he added.

(Additional reporting by William Maclean; Editing by PeterGraff)

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

Keywords: IRAN ECONOMY/