UPDATE 2-As rial plunges, US Congress looks at expanding Iran sanctions
* Sanctions mulled for more Iran central bank transactions
* Aimed at pressuring Iran to abandon nuclear program
* Looking at ways to freeze reserves held outside Iran
* Senator Menendez will seek action after Nov. 6 election
WASHINGTON, Oct 5 (Reuters) - U.S. lawmakers are considering expanding American economic sanctions on Iran - measures that already have helped push that country's currency into free fall but have not yet convinced Tehran to abandon its nuclear program.
Democratic Senator Robert Menendez, a member of the Senate Banking and Foreign Relations Committees, said he plans to push for new penalties on foreign banks that handle any significant transactions with the central bank of Iran. Only oil-related transactions are now covered by sanctions.
A senior House of Representatives Democrat, Howard Berman, is working on additional possible sanctions on Iran.
Menendez said he is also looking at ways to freeze an estimated 30 percent of Iran's foreign currency reserves held in banks outside the country.
"It seems to me we have to completely exhaust all the tools in our sanctions arsenal, and do so quickly, before Iran finds a way to navigate out of its current crisis," Menendez said in an interview.
Iran's economy has been badly hit by U.S. and European sanctions imposed to try to pressure the Iranian leadership to stop pursuing nuclear weapons. The Iranian rial currency has lost a third of its value against the dollar in the past 10 days and as much as 80 percent since the beginning of the year.
Iran says its nuclear program is for peaceful purposes.
The U.S. Congress is out of session until after the Nov. 6 presidential election, meaning any action on fresh sanctions will have to wait until then.
Menendez said he hopes the additional sanctions will become part of an annual defense policy bill that the Senate and House must finalize after the election.
An aide to Berman said the congressman - the top Democrat on the House Committee on Foreign Affairs - is working on measures similar to the Menendez proposal. The Senate is controlled by Democrats and the House by Republicans.
In Britain on Friday, U.S. Treasury Department official David Cohen said Iran has the ability to "relieve the pressure its people are feeling" by resolving concerns over its nuclear work. He blamed the rial's plunge on Iran's own economic mismanagement as well as sanctions.
The White House had no immediate comment on possible new sanctions.
'SANCTIONS ARE WORKING'
The rial's plunge and signs of civil unrest in Tehran have given Western policymakers hope that economic sanctions may be biting deeper.
Time is running short to do more, Menendez said. "Sanctions are working, but we aren't sure they will work quickly enough to force Iran to put its nuclear program on the table," he said.
The stakes are high. Israeli Prime Minister Benjamin Netanyahu last week suggested Israel might use military force against Iran if its uranium enrichment program passes what he termed a "red line."
The European Union is discussing its own possible broad trade embargo against Iran that would include sweeping measures against the central bank and energy industry.
Striking a more cautious tone, U.N. chief Ban Ki-moon said on Friday international sanctions are hurting Iran's people and may harm humanitarian operations in the country.
Western powers must 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, a professor of peace studies at Notre Dame University in Indiana.
"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.
Menendez said in the interview on Friday that lawmakers have held only "some preliminary conversations" with the Obama administration on the proposals.
"I would think that the administration would welcome these as a way in which we get to our common goal, which is to ensure that Iran doesn't acquire nuclear weapons," he said.
Some lawmakers want the extended sanctions to cover all transactions except for those involving food and medicine, said a senior congressional aide, speaking on condition of anonymity.
"You really move to a total embargo scenario," the aide said. "The Iranian economy would collapse pretty quickly."
The United States has long barred U.S. firms from doing business with Iran, and last December adopted measures to force international buyers of Iranian oil to cut their purchases.
The United States has given major buyers of Iranian oil six-month waivers of the rules as long as they are making "significant" cuts. As those waivers come up for renewal, the U.S. government needs to ensure it asks for even bigger cuts in Iranian oil purchases, Menendez said.
"We must make it clear - this is a big must - that absent some extraordinary circumstance, that we will not grant waivers to any nation that doesn't make our reduction benchmarks," he said.
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