Iran's biggest bank said it had taken legal action against another local lender, an Iranian news agency reported, in the wake of a $2.6 billion fraud which has shaken Iran's political establishment.

The biggest fraud in the 32-year history of the Islamic Republic revolves around forged documents allegedly used by the directors of the Amir Mansour Aria Investment Company to secure loans totalling $2.6 billion to buy state-owned companies under the government's privatisation scheme.

Seven banks, including Bank Saderat - a large, partly privatised company - have been implicated in the scandal which began in 2007 but only came to light last September.

'Bank Melli has taken legal action against people and companies of Aria group and Bank Saderat because of their involvement in the criminal act that has caused great financial damage to Bank Melli and its reputation,' the bank's managing director was quoted as saying by ISNA news agency, which was monitored by Reuters in Dubai.

The head of Bank Saderat, who was forced from his post last year by a government committee, said he had helped uncover the crime rather than being responsible for it.

Thirty-two people suspected of involvement in the fraud went on trial earlier this year in Tehran.

The main defendant, named by ISNA earlier this year as Mah Afarin Amir Khosravi, faces the charge of 'corruption on earth', which carries the death penalty.

President Mahmoud Ahmadinejad has rejected accusations from his hardline rivals that Khosravi had links to the head of his presidential office, Esfandiar Rahim Mashaie.

Conservatives loyal to Supreme Leader Ali Khamenei accuse Mashaie of spreading a 'deviant current' that seeks to dilute the Islamic character of Iran and undermine the role of the clergy.

The row has weakened Ahmadinejad's standing during his final presidential term.-Reuters