Thirty-two people suspected of involvement in a multi-billion dollar banking fraud with alleged links to the government of Iranian president Mahmoud Ahmadinejad have gone on trial in Tehran, the Iranian state news agency reported.

The record embezzlement case revolves around forged documents allegedly used by the directors of the Amir Mansour Arya Investment Company to secure loans totalling $2.6 billion to buy state-owned companies under the government's privatisation scheme.

Seven banks have been implicated in the scandal which began in 2007 but only came to light last September.

The defendants and their lawyers appeared on Saturday at one of Tehran's revolutionary courts, which was open to the press, IRNA reported.

'The activities of the Amir Mansour development company is an example of an organised gang that has undermined the economic security of the society,' said Tehran prosecutor general, Abbas Jafari Dolatabadi, reading out the 200-page indictment.

The main defendant was named by the Iranian Student News Agency as Mah Afarin Amir Khosravi who faces the charge of 'corruption on earth', that carries the death penalty.

'The Khosravis had modest life styles but a few years ago they decided to get loans,' the Iranian Student News agency quoted Dolatabadi as saying. 'In order to speed up the process, they established relations with some executive and political people and started giving bribes.'

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

The prosecution alleges the gang undermined the economic security of society through paying large bribes to bank and government officials to secure illicit loans and wealth.

The names of other defendants were not published but during proceedings Dolatabadi indicated that Khosravi's four sons were central to the fraud. Accusations have also been levelled against Mahmoud Reza Khavari, the former head of Bank Melli, who fled to Canada after the fraud was uncovered.

The trial is likely to compound the power struggle between Ahmadinejad and the Supreme Leader, Ali Khamenei, which emerged in public last year.

After a spat over the sacking of the intelligence minister, conservatives loyal to Khamenei launched a sustained campaign to intimidate the president by arresting close advisers and accusing him of challenging the Supreme Leader's authority.

They accuse Rahim Mashaie of spreading a 'deviant current' in the presidency by trying to dilute the Islamic character of Iran and undermine the role of the clergy.

The trial could further damage Ahmadinejad's standing among the Iranian public in the runup to parliamentary elections being contested by the rival hardline factions of the two leaders. Khamenei supporters hope to capitalise on widespread discontent over Ahmadinejad's handling of the economy to defeat his allies.

According to its website, the Amir Mansour Investment Company owns 20 companies across Iran, ranging from steel to food production, employing 20,000 staff.

The government took possession of the company's assets, worth more than $4 billion, in September.-Reuters