UPDATE 2-Tehran's Grand Bazaar reopens, currency trade still frozen

* Plunge of rial triggered street protests

* Heavy police presence as bazaar reopens

* Rial dealers unwilling to accept state-mandated rate

* So many Iranians may lose access to hard currency

* U.S., EU may tighten sanctions further

(Recasts with reopening of Grand Bazaar)

By Andrew Torchia and Yeganeh Torbati

DUBAI, Oct 6 (Reuters) - Tehran's Grand Bazaar reopenedunder close police supervision on Saturday, traders said, daysit was shut by clashes between riot police and protestersblaming the government for the collapse of the Iranian currency.

But President Mahmoud Ahmadinejad's government remainedlocked in a test of wills with currency dealers as it triedunsuccessfully 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 shoppingareas, said uncertainty over whether authorities could stabilisethe currency was making business planning difficult.

"The dominant thing on every merchant's mind is concern fortomorrow," one shop owner told Reuters by telephone, decliningto be named because of the political sensitivity of speaking toforeign media.

On Wednesday, riot police fired tear gas, foughtdemonstrators and arrested money changers in and around thebazaar. Ahmadinejad blamed speculators for the rial's slide,which is eating into living standards and destroying jobs in theindustrial sector.

The involvement of the Grand Bazaar in the protests ispolitically significant because merchants from the area were keysupporters of Iran's Islamic revolution in 1979. Some traderssaid 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 againstIran over its disputed nuclear programme, but many Iranians alsoblame economic mismanagement by Ahmadinejad's administration.

After the protests, most free market trade of the rial inTehran and Dubai, a major centre for business with Iran, groundto a halt because dealers feared being targeted by police forquoting rates that displeased the government, and because of thehuge financial risks of trading such a volatile currency.


Authorities attempted to revive trade on Saturday bydictating a rate. The Iranian Money Changers Association, astate-licenced body, instructed its members to sell dollars at28,500 rials, Mehr news agency quoted a trader as saying. Thatwas much stronger than the record low of 37,500 early this week.

But dealers in Tehran and Dubai told Reuters there wasalmost no trade because the rates indicated by state bodies werenot commonly accepted in the market.

Money changers in Tehran "tell us not even to call them toask the price of currency. They say they are not giving rates,"said a merchant in the capital.

The website of SarafiJalali.com, a Tehran-based moneychanger, said that to comply with the policies of the centralbank, it had stopped announcing rates. The firm said it hoped toresume quoting the rial in future with the permission of thecentral bank, but did not elaborate.

If the currency market stays frozen, many Iranians maybecome unable to conduct businesses that involve imports, whileforeign travel and study abroad may be curtailed. This couldincrease discontent with the government.

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 official channels such as a new foreign exchange centre,which was set up last month to serve importers of basic goods.


Ordinary Iranians have rushed to convert their savings intodollars to escape the rial's depreciation and avoid highinflation, which the government says is running at about 25percent but private economists put much higher.

Although staple foods and basic consumer goods produceddomestically are still generally available, the volatility ofthe rial and prices has in the past few weeks begun to make someforeign products unavailable, Tehran residents told Reuters.

A seller of imported personal computer equipment toldReuters by phone he had halted sales because he could no longercalculate what his products were worth in rials.

In a report to the United Nations General Assembly that wasreleased on Friday, U.N. chief Ban Ki-moon said the sanctionswere having a "significant" effect on Iran's people and alsoseemed to be harming humanitarian operations in the country.

"Even companies that have obtained the requisite licence toimport food and medicine are facing difficulties in findingthird-country banks to process the transactions," he said.

But unless Tehran allows more international monitoring ofits nuclear energy programme, Iran's economic pain looksunlikely to prompt Western governments to ease the sanctions,and it may even encourage them to take further steps.

Democratic Senator Robert Menendez, on the U.S. Senate'sBanking and Foreign Relations Committees, told Reuters this weekhe was considering how to expand U.S. sanctions against Iran -including how to freeze an estimated 30 percent of its foreigncurrency reserves held in banks outside the country.

Meanwhile, the European Union has begun discussing thepossibility of a broad trade embargo against Iran, moving beyondthe energy, business and financial restrictions imposed so far.

(Reporting by Marcus George and Yeganeh Torbati in Dubai, andZahra Hosseinian in Zurich; Editing by Jon Hemming)

((andrew.torchia@thomsonreuters.com)(+9715 6681 7277)(ReutersMessaging: andrew.torchia.thomsonreuters.com@reuters.net))