UPDATE 1-Iran blames economic "conspiracy" as price rises loom

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

* Currency has collapsed in past week

* More price rises feared when Tehran bazaar reopens

(Adds quotes, background) 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, aspressure mounts on authorities to deal with the rapid collapseof 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 week.

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

But there has so far been no public criticism of Khamenei,the Islamic 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," Gholam Ali Haddad Adel, anadviser to Khamenei, said in a report by the semi-official Farsnews agency.

"The arrogant powers, in their crude way, think that thenation of Iran is ready to let go of the Islamic revolutionthrough economic pressure but we are establishing Iran'seconomic strength," he said.

Haddad Adel is an ally of Khamenei and father-in-law to hisson Mojtaba.

Ayatollah Ahmad Khatami, a hardline cleric, called on thevarious branches of government to work together to solve thecountry's economic problems.

"It is expected that the authorities should solve theproblems with empathy. Treating the pain will solve the problem,not apportioning blame," he said in a sermon at Friday prayers.

Most of the 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," Ali, 42-year-old Iranian engineer,told Reuters by telephone. He earns $1,000 a month.

"But everything has become so expensive and so difficult forpeople. I'm just glad I have a job."

This week's plunge in the rial has not yet made groceriesmore expensive, says Ali, but he fears more price rises arearound the corner.

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 about the availability of dollars,the centre seems to have intensified the race for hard currency.

Despite this, there is no indication that the governmentwill back down from its policies, which analysts say will leaveKhamenei with the dilemma of backing Ahmadinejad or blaming him.

"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. Otherwise it will haveto back him with force," said Iranian-born Mehrdad Emami, aneconomics 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.

Iran's leaders could stabilise and possibly strengthen therial if they take the right decisions, say analysts. The countryhad $106 billion of foreign currency reserves at the end of lastyear, according to the International Monetary Fund.

Even if these reserves have now fallen by tens of billionsof dollars, there are still enough petro-dollars left to prop upthe market and boost the rial if the government chose to do so.

"The drop of the rial is completely related to politics andpsychology. Iran has more than enough foreign exchange to defendits currency," said Mohammad Ali Shabani, a London-based Iranianpolitical analyst.

(Reporting by Marcus George; Editing by Giles Elgood)

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Keywords: IRAN ECONOMY