DUBAI/MANAMA Jan 14 (Reuters) - Banks in the Gulf Arab region are yielding to pressure to sever links with Iran as the United States pushes for a tighter sanctions on Tehran over its nuclear programme.
Banks in the United Arab Emirates, the second-largest Arab economy, have stopped issuing letters of credit to Iranian companies, bankers said, while Bahrain is pressing its biggest lender to freeze the Iranian operations of an affiliate.
Iran, increasingly isolated from the West, has long had close economic ties with most Gulf states, especially the UAE and Bahrain, Arab allies of Washington and home to the Middle East's biggest financial centres.
Although business is flourishing, from formal trade and tourism to smuggling across the Gulf, U.S. efforts to cut Iran's access to the global financial system are taking their toll.
"Because of the cloudy situation and possibility of sanctions, we are not issuing letters of credit on behalf of Iranian companies at the moment," said a Dubai-based official at the National Bank of Fujairah, who asked not to be identified.
"It's happened over the last six months," the official said.
During a Middle East tour this week, U.S. President George W. Bush urged Gulf states to confront Tehran "before it is too late". Washington is pressing the United Nations to tighten sanctions on Iran, accusing it of seeking nuclear weapons, a charge that Iran denies.
The UAE was yielding to the pressure, said Nasser Hashempour, vice-president of the Iranian Business Council in Dubai, who estimates Iranians account for about 10 percent of UAE's 4 million people.
Iranian companies were skirting the problem by incorporating in the UAE.The number of Iranian firms in the UAE has ballooned to around 9,000 now from 2,300 in 2003, Hashempour said.
"We have seen a surge over the last two to three years, because companies have been expecting sanctions in some form to happen, so they have turned to the UAE," he said.
"Iranian letters of credit are not accepted in a lot of countries, so firms are using the UAE. UAE banks do not accept Iranian companies unless they were registered in the UAE," he said.
Over the last five months the UAE government has begun unofficially blocking attempts by Iranian companies to set up shop in the country, Hashempour said.
These firms were mostly operations of private sector businesses in Iran, rather than fronts for state enterprises such as the National Iranian Oil Company, he said.
International banks are already reluctant to deal with Iran. French banks BNP Paribas (BNPP.PA) and Calyon (CAGR.PA) stopped offering letters of credit last year for oil sales to Iran because of U.S. pressure, industry sources said last week.
Tehran is countering this by using open credit lines to finance fuel imports, an oil industry source said on Monday. Transactions were settled in euros to avoid U.S. scrutiny, he said.
Bahrain, which competes with Dubai for the region's financial services business, is also cracking down on banking links to Iran.
The government is putting pressure on Ahli United Bank AUBB.BH the country's largest lender, to freeze the Iranian operations of its Future Bank affiliate, Jasem Ali, member of parliament's finance and economic committee, told Reuters.
Future Bank was established on in 2004 as a joint venture with Bank Saderat Iran and Bank Melli Iran, according to its Web site. Ahli United Bank officials declined to comment.
"There has been a lot of pressure on Bahrain," Ali said. "There's only so much the U.S. can do. Iran is a major trading partner with the UAE and Bahrain and it has a lot to offer -- food, energy, tourism," he said. (Editing by Quentin Bryar)