UPDATE 1-As rial plunges, US Congress looks at expanding Iran sanctions

* May apply sanctions on Iran central bank transactions

* Aimed at pressuring Iran to rein in nuclear program

(Adds comments from analysts)

By Roberta Rampton

WASHINGTON, Oct 5 (Reuters) - Lawmakers in the U.S. Congress are looking at ways to expand economic sanctions on Iran, measures that have helped push the country's currency into free fall but have not yet pressured Tehran to abandon its nuclear program.

The proposals, still in the early stages of development, would aim to penalize foreign banks that handle any significant transactions with the Central Bank of Iran. Only oil-related transactions are now covered.

"We are seriously looking at additional policy options, including further closing the (Central Bank of Iran) to transactions and other measures designed to impact Iran foreign currency reserves," an aide to Democratic Senator Robert Menendez said on Friday.

Another congressional aide said some lawmakers believe that if all banking transactions except for food and medicine were covered, the Iranian economy would collapse "pretty quickly."

Menendez and Republican Senator Mark Kirk were co-authors of a sanctions law passed in December that targeted revenues from Iran's oil sales as a way to stop it from pursuing nuclear weapons. Iran says its nuclear program is for peaceful purposes.

The plunge of the rial and signs of civil unrest in Tehran have given Western policymakers hope that economic sanctions may be biting deeper. The stakes are high, with Israeli Prime Minister Benjamin Netanyahu last week suggesting Israel might use military force against Iran if its uranium enrichment program passes what he termed a "red line."

Iran has blamed the plunge in the currency on what it says is a foreign conspiracy.

The European Union has begun discussing the possibility of its own broad trade embargo against Iran that would include sweeping measures against the central bank and energy industry.

But Western powers need to make sure diplomacy is a central part of the process for resolving the nuclear issues, rather than simply turning up the sanctions pressure, said George Lopez, peace studies professor at Notre Dame University.

"There's no guarantee that a government that's finding itself in collapse wants to negotiate a nuclear treaty, those can be the worst conditions," Lopez said.

The new U.S. congressional measures could become part of an annual defense policy bill, which the Senate and House of Representatives need to finalize after the Nov. 6 presidential election, said a congressional aide, who spoke on condition of anonymity.

"It's just a matter of tweaking the current law, very slightly," the aide said.


Some lawmakers are pushing for all transactions except for those involving food and medicine to be covered by the banking sanctions, the aide said.

"You really move to a total embargo scenario," the aide said. "The Iranian economy would collapse pretty quickly."

At a minimum, the aide said a proposal could be revived to block any company from U.S. financial markets if it does any type of business with any type of Iranian energy firm. That plan had been floated earlier this year.

The United States has long barred U.S. firms from doing business with Iran, but last December adopted measures that forced international buyers of Iranian oil to cut their purchases.

In August, a second package of sanctions added more restrictions for international banks, insurance companies and oil traders.

As part of that law, the government is required to report next week on Iran's natural gas production and exports, including the impact a reduction in exports would have on global natural gas prices.

In December, the administration is required to tell Congress whether Iranian exports of natural gas could be sanctioned under existing laws and what the impact of those sanctions would be.

Suzanne Maloney, an expert on Iran at the Brookings Institution, said she thinks the Obama administration would support new measures as "a reminder to Tehran that the country's plight can get worse."

But because Tehran still exports around a million barrels of oil every day, the regime may have enough cash reserves to be able to ride out sanctions pressure for some time, Maloney said.

"The outcome is more likely to be the corrosion of the economy, rather than its outright collapse," she said.

(Additional reporting by Timothy Gardner; Editing by Karey Wutkowski, Philip Barbara and Vicki Allen)


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