* Government centre, state media quote rial much stronger
* But free market traders unwilling to use their rates,market activity almost frozen
* Dealers fear being targeted by government * Most Iranians may lose access to hard currency By Andrew Torchia
DUBAI, Oct 6 (Reuters) - Iran's government was locked in atest of wills with currency dealers on Saturday as it triedunsuccessfully to impose a stronger rial exchange rate, after aplunge by the currency earlier in the week triggered streetprotests.
Iranian news agencies reported that the government's newforeign exchange centre, used by importers of some basic goods,was selling U.S. dollars at a rate of 25,970 rials.
The state-linked news agencies, as well as Iraniancurrency-tracking website Mesghal, said the rial was trading inthe free market at 28,500, much stronger than levels near 37,500early in the week.
But dealers in Tehran and Dubai, a major centre for businesswith Iran, told Reuters there was almost no trade in the freemarket because rates indicated by state media were not commonlyaccepted.
The mass of Iranians obtain hard currency for business andforeign travel, and to protect their savings against inflationwhich is widely believed to be running above 25 percent, fromthe free market.
Money changers in Tehran "tell us not even to call them toask the price of currency. They say they are not giving rates,"a merchant in the capital said by telephone. He declined to benamed because of the political sensitivity of the issue.
A message on Mazanex, an Iranian currency-tracking website,read: "Unfortunately we still cannot access rates to cite forthe domestic market."
The website of SarafiJalali.com, a Tehran-basedmoneychanger, said: "To comply with the policies of the CentralBank of the Islamic Republic of Iran, and to help organise thecurrency market of Iran, Sarafi Jalali for now will not announceany rates. Subject to permission from the central bank, theannouncement of a new rate will be made." It did not elaborate.
Under pressure from Western economic sanctions against Iran,the rial hit a record low of around 37,500 to the U.S. dollarlast Tuesday, losing about a third of its value in 10 days.
The slide prompted anti-government demonstrations nearTehran's Grand Bazaar as police arrested money changers whomauthorities accused of speculating against the currency.
Most free market trade of the rial in Tehran and Dubai thenground to a halt because dealers feared being targeted by policefor quoting rates that displeased the government, and because ofthe huge financial risks of trading such a volatile currency.
If the free market in currencies stays frozen, Iranians maybecome unable to conduct businesses that involve imports, whileforeign travel and study abroad may be curtailed. This couldincrease discontent with the government's economic management.
Some analysts believe that despite the sanctions, which haveslashed Iran's oil earnings, the government still has enoughforeign currency to flood the free market with dollars andengineer a sharp rebound of the rial if it chooses.
At the end of last year, Iran's official foreign reservestotalled $106 billion, according to the International MonetaryFund. Analysts estimate reserves may now have dropped by severaltens of billions of dollars, but that would still allow Iran topay for roughly a year of merchandise imports.
So far, however, the central bank has been unwilling torelease large amounts of dollars into the market to support therial. Instead, authorities have been rationing hard currencythrough the foreign exchange centre and other official channels.
Some analysts think that with its arrests of money changersand the launch late last month of the exchange centre,authorities aim eventually to shut down the entire free marketin currency and move all trade into state-controlled channels.
The government announced on Friday that its centre could nowbe used by importers of a wider variety of basic goods,including olive oil, construction machinery and industrial oils.
Meanwhile, importers of priority goods such as meats,grains, medical equipment and medicines are eligible for dollarsat a government-subsidised "reference rate" of 12,260 rials.
It is not clear, however, whether the mass of Iranians willbe given access to the official channels for obtaining hardcurrency, or whether authorities are prepared to supply enoughdollars to satisfy them.
In its first week of operations the exchange centre suppliedonly $181 million, according to a central bank statement, asmall fraction of the roughly $2 billion which Iran spends onimports every month.
(Reporting by Marcus George and Yeganeh Torbati in Dubai, andZahra Hosseinian in Zurich; Editing by Jon Hemming)
Keywords: IRAN ECONOMY/