* Government centre, state media quote rial much stronger
* But free market traders unwilling to use their rates, market activity almost frozen
* Dealers fear being targeted by government * Most Iranians may lose access to hard currency By Andrew Torchia
DUBAI, Oct 6 (Reuters) - Iran's government was locked in a test of wills with currency dealers on Saturday as it tried unsuccessfully to impose a stronger rial exchange rate, after a plunge by the currency earlier in the week triggered street protests.
Iranian news agencies reported that the government's new foreign exchange centre, used by importers of some basic goods, was selling U.S. dollars at a rate of 25,970 rials.
The state-linked news agencies, as well as Iranian currency-tracking website Mesghal, said the rial was trading in the free market at 28,500, much stronger than levels near 37,500 early in the week.
But dealers in Tehran and Dubai, a major centre for business with Iran, told Reuters there was almost no trade in the free market because rates indicated by state media were not commonly accepted.
The mass of Iranians obtain hard currency for business and foreign travel, and to protect their savings against inflation which is widely believed to be running above 25 percent, from the free market.
Money changers in Tehran "tell us not even to call them to ask the price of currency. They say they are not giving rates," a merchant in the capital said by telephone. He declined to be named because of the political sensitivity of the issue.
A message on Mazanex, an Iranian currency-tracking website, read: "Unfortunately we still cannot access rates to cite for the domestic market."
The website of SarafiJalali.com, a Tehran-based moneychanger, said: "To comply with the policies of the Central Bank of the Islamic Republic of Iran, and to help organise the currency market of Iran, Sarafi Jalali for now will not announce any rates. Subject to permission from the central bank, the announcement of a new rate will be made." It did not elaborate.
Under pressure from Western economic sanctions against Iran, the rial hit a record low of around 37,500 to the U.S. dollar last Tuesday, losing about a third of its value in 10 days.
The slide prompted anti-government demonstrations near Tehran's Grand Bazaar as police arrested money changers whom authorities accused of speculating against the currency.
Most free market trade of the rial in Tehran and Dubai then ground to a halt because dealers feared being targeted by police for quoting rates that displeased the government, and because of the huge financial risks of trading such a volatile currency.
If the free market in currencies stays frozen, Iranians may become unable to conduct businesses that involve imports, while foreign travel and study abroad may be curtailed. This could increase discontent with the government's economic management.
Some analysts believe that despite the sanctions, which have slashed Iran's oil earnings, the government still has enough foreign currency to flood the free market with dollars and engineer a sharp rebound of the rial if it chooses.
At the end of last year, Iran's official foreign reserves totalled $106 billion, according to the International Monetary Fund. Analysts estimate reserves may now have dropped by several tens of billions of dollars, but that would still allow Iran to pay for roughly a year of merchandise imports.
So far, however, the central bank has been unwilling to release large amounts of dollars into the market to support the rial. Instead, authorities have been rationing hard currency through the foreign exchange centre and other official channels.
Some analysts think that with its arrests of money changers and the launch late last month of the exchange centre, authorities aim eventually to shut down the entire free market in currency and move all trade into state-controlled channels.
The government announced on Friday that its centre could now be used by importers of a wider variety of basic goods, including olive oil, construction machinery and industrial oils.
Meanwhile, importers of priority goods such as meats, grains, medical equipment and medicines are eligible for dollars at a government-subsidised "reference rate" of 12,260 rials.
It is not clear, however, whether the mass of Iranians will be given access to the official channels for obtaining hard currency, or whether authorities are prepared to supply enough dollars to satisfy them.
In its first week of operations the exchange centre supplied only $181 million, according to a central bank statement, a small fraction of the roughly $2 billion which Iran spends on imports every month.
(Reporting by Marcus George and Yeganeh Torbati in Dubai, and Zahra Hosseinian in Zurich; Editing by Jon Hemming)
Keywords: IRAN ECONOMY/