* Police clash with protesters over rial's fall
* Currency plunge linked to Western sanctions
* Money changers arrested
* Panicked Iranians scramble for dollars
(Adds Khamenei remarks, edits)
By Yeganeh Torbati and Marcus George
DUBAI, Oct 3 (Reuters) - Riot police clashed with demonstrators and arrested money changers in Tehran on Wednesday in disturbances over the collapse of the Iranian currency, which has lost 40 percent of its value against the dollar in a week, witnesses said.
Police fired tear gas to disperse the demonstrators, angered by the plunge in the value of the rial. Protesters denounced President Mahmoud Ahmadinejad as a "traitor" whose policies had fuelled the crisis.
In a clampdown on the unofficial foreign currency market, a number of traders selling dollars were arrested after authorities ordered security forces to take action against those they see as speculators.
The rial has hit record lows against the U.S. dollar almost daily as Western economic sanctions imposed over Iran's disputed nuclear programme have cut Iran's export earnings from oil, undermining the central bank's ability to support the currency.
Panicking Iranians have scrambled to buy hard currency, pushing down the rial whose increasing weakness is hurting living standards and threatening jobs.
"Everyone wants to buy dollars and it's clear there's a bit of a bank run," said a Western diplomat based in Tehran.
"Ahmadinejad's announcement of using police against exchangers and speculators didn't help at all. Now people are even more worried."
The protests are seen as posing a threat to Ahmadinejad rather than the government, which is expected to put a stop to the foreign exchange black market, pump in funds to stabilise the currency and prevent the protests from spreading.
Tehran's main bazaar, whose merchants played a major role in Iran's revolution in 1979, was closed on Wednesday. A shopkeeper who sells household goods told Reuters that currency chaos was preventing merchants from quoting accurate prices. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
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A computer dealer said he had halted sales because of the volatility in the currency market. "The same product can change price within an hour," he said by telephone.
The protests centred around the bazaar and spread, according to the opposition website Kaleme, to Imam Khomeini Square and Ferdowsi Avenue -- scene of bloody protests against Ahmadinejad's re-election in 2009.
Protesters shouted slogans like "Mahmoud the traitor - you've ruined the country" and "Don't fear, don't fear - we are all together," the website said.
The semi-official Mehr news agency said the largest gatherings were around the currency-trading centres of Ferdowsi Avenue, the Istanbul intersection, and Imam Khomeini Square and that security forces had been deployed to disperse the protests.
Iranian authorities currently do not allow Reuters to report from inside the country.
ï¿½ The national currency dived to a record low on Tuesday to 37,500 to the U.S. dollar in the free market, from about 34,200 at the close of business on Monday, foreign exchange traders in Tehran said. On Monday last week, it traded at around 24,600.
Ahmadinejad on Tuesday blamed the crisis on the U.S.-led economic sanctions on Iran and insisted the country could ride out the crisis. He said security forces should act against 22 "ringleaders" in the currency market.
Iran's Supreme Leader Ayatollah Ali Khamenei struck a defiant note in a speech on Wednesday.
"The Iranian nation has never submitted to pressures and never will, and this is why the enemy is angry," he said.
Mehrdad Emadi, an Iranian-born economic adviser to the European Union, said the slide in the rial had prompted many Iranians to try to limit their losses by buying dollars.
"The rush out of the rial shows that everyone wants to sell. But clearly it is going to make the life of ordinary Iranians very painful and difficult," he said.
The rial's slide suggested the Western sanctions were having a serious impact. Many businessmen and ordinary citizens say the government is at least partly to blame for the currency crisis, and Ahmadinejad has been criticised by enemies in parliament.
The rial's losses accelerated in the past week after the government launched an "exchange centre" to supply dollars to importers of basic goods; businessmen say the centre failed to meet demand for dollars.
Websites providing rates for the rial stopped updating on Tuesday, and Dubai money changers said they were not selling it because they had lost contact with their Tehran counterparts.
(Writing by Samia Nakhoul, Additional Reporting by Yeganeh Torbati and Marcus George; Editing by Giles Elgood)
Keywords: IRAN CURRENCY/PROTESTS