The central banks of UAE and Qatar have told lenders to stop financing trade with Iran, bankers said, cutting another source of credit for a country struggling under Western economic sanctions imposed over its nuclear programme.

The Gulf has a long history of trade with Iran, especially in Dubai where there is a large Iranian trading community, and Gulf banks had been expected to fill a funding gap for the import of grains left by European lenders banned from financing trade by EU sanctions.

'Banks in Dubai were asked by the UAE central bank to stop issuing letters of credit to finance trade with Iran. Before the sanctions, the central bank regularly checked on trading with Iran and wanted to know of all dealings between the two countries,' said a Dubai-based banker active in trade financing.

'Banks can't do this anymore.'

About 8,000 Iranian traders are registered in Dubai, and re-export trade between Iran and the UAE totalled Dh19.5 billion ($5.32 billion) in the first half of 2011, according to the latest figures from UAE's customs authority.

Qatar's central bank also recently told banks to stop providing credit for Iranian trade, according to a senior Doha-based banker.

Iran is struggling under the weight of sanctions. Its currency, the rial, has depreciated, there has been a run on its banks and inflation is rising, US intelligence chiefs have said.

The US imposed the harshest sanctions so far on Iran, banning transactions involving Iran's central bank, and the European Union has banned the import, purchase or transport of Iranian oil, cutting off its main foreign currency earner.

The 27-member bloc also agreed in January to freeze the assets of Iran's central bank to try to persuade Iran to stop its nuclear programme, which the West says is aimed at producing an atomic weapon. Iran denies the charge.

The sanctions, which Western powers say are aimed only at the Iranian administration, may be having unexpected consequences.

Shipments stop

Iran is heavily dependent on grain imports for animal feed, but some 10 ships have been unable to deliver grain to Iran for more than three weeks after banks refused to process payments, or offer loans to, Iranian buyers.

On Thursday, up to five of those vessels may have been diverted to new destinations, ship tracking data showed.

The UAE's central bank ordered financial institutions two years ago to freeze Iran-linked accounts belonging to firms targeted by United Nations sanctions.

In Bahrain, which has traditionally had more limited trade ties with Iran, there have been no guidelines.

'Business with Iranians flourished in the past but Bahrain was never a trading hub like Dubai,' one senior banker said. 'Financing export of goods through the ports wasn't really a prime line of business.'

Iranian trade with Dubai has flowed for decades, plied by wooden dhows carrying household goods and basic commodities such as grain, rice and sugar.

'Historically, grain came to Dubai from South America, mainly Argentina, the US and EU, mainly France and then re-exported from Dubai to Iran,' said the Dubai-based banker.

'That was very good business for Dubai which acted as a trade hub,' he added.-Reuters