U.S. tightens squeeze on Iran as friends join in

By Mark Trevelyan, Security Correspondent - Analysis

LONDON (Reuters) - Tough talk on Iran has captured the headlines on President George W. Bush's Middle East tour, but it is the quiet tightening of U.S.-led economic pressure that poses the greater challenge for Tehran.

Even as Bush steps up the rhetoric, calling Iran a threat to international security and the world's top state sponsor of terrorism, there are tangible signs that the squeeze on Iran's oil-based economy is intensifying.

There are also signs Iran is rising to the challenge and some analysts remain skeptical that sanctions can be effective.

The United States has slapped its own sanctions on Iran and will press for a third set of punitive U.N. measures when world powers meet in Berlin next week to discuss Tehran's refusal to halt uranium enrichment.

But beyond the blacklisting of individuals, groups and businesses it suspects of involvement in terrorism or illicit nuclear work, Washington is also leaning on allies around the world to impose a broader economic isolation on Tehran.

In the latest sign that its pressure is yielding results, Bahrain's biggest lender, Ahli United Bank, has suspended business with the Islamic Republic, sources familiar with the matter told Reuters on Wednesday.

Late last year, Indian oil refiner Reliance halted sales of gasoline and diesel to Tehran after French banks BNP Paribas and Calyon stopped offering letters of credit, a standard payment guarantee in international trade.

"It is today impossible more or less in Europe, with a couple of exceptions, to get a letter of credit" for trade with Iran, said a senior German banking and finance consultant.

Financial sources in the Gulf told Reuters this week that banks in the United Arab Emirates have also stopped issuing letters of credit to Iranian companies.

While that has made business more difficult for Tehran, it has found ways to circumvent the restrictions such as opening credit lines settled in euros to finance fuel imports as opposed to dollars.

INTELLIGENCE REPORT

Iran experts said the stranglehold on Tehran was still tightening, despite a U.S. intelligence report last month that judged it had halted its alleged nuclear weapons program under Western pressure in 2003 -- a conclusion that effectively lifted the threat of U.S. military action.

They said the logic for intensifying the squeeze was Iran's continued defiance of U.N. demands to halt uranium enrichment, and the assessment in the intelligence report that a firm, united Western line can influence Tehran's behavior.

"In some ways it justifies a tougher sanctions policy and tougher political pressure," said Ali Ansari of the University of St Andrews in Scotland.

"The intelligence assessment was principally to stop the momentum towards war in the United States. The rest of it is still in place. All these sanctions will still be tightening."