TEHRAN, July 13 (Reuters) - A strike in Tehran's main bazaar in protest against higher taxes has entered its second week even though the government has backed down in the standoff, moderate website Parlemannews reported on Tuesday.
The strike by the influential Grand Bazaar poses political and economic challenges to President Mahmoud Ahmadinejad, who was re-elected last year in a disputed vote. Authorities deny the opposition's claim that the vote was rigged.
Merchants in the bazaar went on strike last Tuesday, forcing the government to announce on Monday it would suspend its plan to raise the rate of Value Added Tax (VAT) by as much as 70 percent on certain goods.
"Shops in Tehran's Bazaar are still closed. It is not clear when merchants will end the strike," the website said, quoting an unnamed merchant.
A merchant told Reuters on Monday the strike would continue until the tax plan was dropped altogether.
In 2008, Ahmadinejad was forced to suspend implementing the plan to introduce 3 percent VAT for two months after merchants in Tehran and other cities went on strike for a week.
Since its implementation, the VAT rate has been raised annually by between six and 15 percent, depending on the goods.
The government has been trying to fill the shortfall of oil income by increasing tax. Iran's economy is more than 60 percent dependent on oil income and the sharp fall in oil prices threatens the economy.
The tax forms part of wider economic reforms planned by Ahmadinejad's government, including a bill that will end subsidies on energy and food. Critics say carrying out the subsidy bill will increase the cost of living in Iran.
Iran, hit by U.N., U.S. and European Union sanctions over its nuclear programme, already faces economic hardship. Higher inflation may cause public unrest.
The United States and its allies suspect the Islamic state wants to produce a nuclear bomb but Tehran says its programme is intended to generate power.
Merchants, who played a major role in Iran's revolution, say the sanctions have slowed down business in Iran.
The clerical establishment is trying to avoid any public discontent that may lead to renewed street protests after last year's election triggered the worst domestic unrest since Iran's 1979 Islamic revolution.
Opposition leader Mirhossein Mousavi again criticised Ahmadinejad's economic and nuclear policy, adding that the pro- reform movement was still alive and "will win the battle soon", Mousavi's Kaleme website reported on Tuesday.
Editing by Angus MacSwan