Gasoline prices in Iran will rise sharply in the coming weeks as the government cuts subsidies on essential goods, an official said, telling motorists the biggest in the first phase of cuts would be in car fuel.

Iranians are nervously waiting to see the impact of President Mahmoud Ahmadinejad's plan to phase out $100 billion of subsidies which economists say is a necessary but politically risky step in the world's fifth-largest oil exporter.

A sudden price rise or scarcity of essential goods could risk re-igniting popular unrest which flared after the hardliner was re-elected in June 2009, analysts say.

The Iranian economy is also under pressure from sanctions over its nuclear programme and, most recently, from a slump in the value of its currency which prompted the central bank to intervene this week.

Government officials say they have withheld details of the first phase of subsidy cuts to avoid panic buying. Iranians know $20 billion will be cut in the second half of the Iranian year which has just begun, but exactly when and how much prices of essential goods will rise has been unclear.

The head of Iran's Transportation and Fuel Management Office said on Friday that the biggest subsidy cut in the first phase would be on car fuel -- a sensitive area in an oil-rich nation where people are used to paying just 10 US cents a litre.

'The final price of gasoline will be much less than IR10,000 (about $1),' Mohammad Royanian was quoted as saying by the semi-official Mehr news agency.

Disagreements in Parliament

The subsidy phase-out -- already delayed for six months due to disagreements between Ahmadinejad and parliament -- was due to start on Sept. 23, but officials said there would be no change in gasoline prices for at least another month.

Motorists can currently buy up to 60 litres a month for just IR1,000 (about $0.10) per litre, above that amount they pay a semi-subsidised price of 4,000 rials. Two lawmakers said they believe the minimum price will rise to IR4,000 this month.

People rioted when gasoline rationing was introduced in 2007 and the government will be keen to avoid a similar reaction this time. Poorer households will receive cash payments to help cushion the blow of price rises.

The International Monetary Fund says the average Iranian family gets about $4,000 a year in subsidies on oil and natural gas alone, more than many people's income. The IMF predicts energy prices will rise between four and 20-fold when the subsidies are cut.

As well as saving the state money, the subsidy cuts are aimed at encouraging less wasteful energy consumption, particularly of gasoline. Despite being a major oil exporter, Iran usually has to import at least one third of its gasoline needs due to a lack of refining capacity.

Sanctions have limited the number of companies willing to sell gasoline to Iran, prompting the Islamic Republic to convert petrochemical plants into refineries, something it says has made it self-sufficient and even an exporter, an achievement analysts say is unlikely to be maintained long-term. – Reuters