UPDATE 1-In Dubai, US sanctions pressure historic business ties with Iran

* Dubai is one of world's top hubs for Iran business

* Business shrinking due to sanctions

* Big swings of Iranian rial increase risks in trade

* International banks unwilling to handle money transfers (Adds ministry comment)

DUBAI, Nov 19 (Reuters) - With its Persian restaurants and shop signs in Farsi, Murshid Bazaar, a dense maze of alleys in Dubai's old quarter, has for decades been a centre for small-scale trade with Iran.

That is changing. One in every dozen or so shops in the once-bustling area is shuttered or carries a "for rent" sign. Indian and Pakistani merchants now far outnumber the Iranians who used to dominate the area.

The Iranians who stayed say the fallout from U.S. sanctions has made their jobs harder. Dubai has long been one of Iran's main links to the outside world, but trade between the two has slowed as sanctions approached.

Imposed in early November and August, the sanctions target Iran's rial currency, autos, metals, oil and banking.

The saffron, clothing and processed foods that the Iranians sell in the bazaar are not directly targeted but the merchants say business conditions have got worse.

Banks in the United Arab Emirates, including in Dubai, have become more reluctant to work with Iranians for fear of exposing themselves to U.S. legal action. And the rial's nearly 70 percent fall against the U.S. dollar this year has made business with Iran risky.

Landlords in the bazaar are offering to waive two months of rent for prospective tenants, said businessman Aftab Hasan, a member of the city's Iranian Business Council.

"A lot of Iranians have shut down their stores," finding it harder to do business in Dubai, he said. Some are considering whether to leave the city in search of other bases for their operations, he added.

The deteriorating bank ties also threaten a larger re-export trade of other countries' goods to Iran through Dubai's ports and airports. In the past, these have included cars and auto parts, consumer electronics, machinery, glass and plastics.

Last year, 29 percent of Iran's $71.5 billion imports passed through the UAE, according to International Monetary Fund data. The vast majority moved via Dubai, which does not disclose timely data on its trade with Iran.

Two-way trade between Iran and the UAE shrank to $1.75 billion in July from $2.49 billion last December. In 2014, at the height of the previous sanctions period, monthly trade averaged $1.92 billion.

Mehrdad Emadi, an Iranian economist who heads energy risk analysis at London's Betamatrix consultancy, said rial weakness triggered by the approach of the sanctions had hurt trade because Iran reduced imports as they became more expensive.

"When you have a massive currency devaluation, import prices rise, and wages did not rise as fast in Iran so people were forced to cut back," he said.

BANKING DIFFICULT

Visits to the Gulf this year by U.S. Treasury officials to discuss the legal enforcement of sanctions, made the region's banks nervous of links with Iran, Emadi said. This made it harder to arrange payments for trade, he added.

Banks in Dubai no longer open accounts for Iranians without obtaining the co-signature of a UAE national and demanding a series of documents, said the Iranian manager of a herbs and spices shop at Murshid Bazaar. International money transfers through banks have largely become impossible, he said.

UAE central bank governor Mubarak Rashed al-Mansoori said this month that UAE banks were cautious about Iran business because of their need to keep relations with clearing banks in the United States.

He said two Iranian banks, Bank Melli and Bank Saderat, which largely serve Iranians, would continue operating in the UAE.

The Dubai government referred questions on sanctions to the UAE economy ministry. A ministry official said the UAE was fully complying with U.S. sanctions.

Iran's central bank said last month UAE banks were no longer facilitating transactions for Iranian merchants. It said Tehran was seeking regional alternatives to replace the UAE as a centre for its banking business, the Iranian IRNA news agency reported.

SEEKING ALTERNATIVES

U.S. President Donald Trump reimposed the sanctions in an effort to curb Tehran's missile and nuclear programs and diminish the Islamic Republic's influence in the Middle East, notably its support for proxies in Syria, Yemen and Lebanon.

They are largely a repeat of measures imposed by President Barack Obama between 2012 and 2015 although U.S. officials say they plan further action.

With business ties to Iran stretching back over a century and an Iranian population estimated at 200,000 or more, well over 5 percent of the total, Dubai has ridden out sanctions before.

Businessmen have found ways to continue operating. Some Iranian traders used people of other nationalities to transfer money abroad or struck barter deals, involving an exchange of goods with no payments of hard currency.

But the Obama administration did not rigidly enforce sanctions, leaving a small number of banking and trading channels open. The Trump administration appears to be taking a tougher line.

At the Iranian Business Council, membership has fallen to about 50 from 500 in 2011. This is partly because businesses are reluctant to be associated with the group during sanctions, said Hossein Asrar Haghighi, an Iranian businessman and member who has lived in Dubai for 37 years.

Some are moving to other places such as Turkey or Europe, he added.

"Investors look for the best terms possible to do their business and make their living, and when they are facing these kinds of difficulties...they look for alternatives," he said.

(Editing by Anna Willard)