Iran President Mahmoud Ahmadinejad faces a challenge from reformers as the Islamic Republic heads to a presidential election amid a situation where the loudest complaints in Tehran are still rising consumer prices and lack of jobs.

"There is more money," said the middle-aged Iranian restaurateur Mohsen Misaqi in downtown Tehran. "But with much less buying power. One cannot but feel economic hardship as a result of higher prices for almost everything."

People like housewife Behjat Soltani agree the economy is Ahmadinejad's weakest point in the run-up to the June 12 poll:

"Our family's economic situation has deteriorated considerably compared with four years ago," said the 41-year-old, wearing a black headscarf as she bought food and other groceries in a small Tehran store.

But if such bread-and-butter issues work against the incumbent among some in the capital, Ahmadinejad may be stronger electorally in the countryside. The rural poor helped vote him in last time, have benefited from his largesse and like his down-to-earth image.

"He still has an enduring popularity, although probably not as high as a few years back, among the urban and rural masses," said Karabekir Akkoyunlu of risk consultancy AKE in London.

When the state coffers were swelled by an unprecedented inflow of petrodollars, Ahmadinejad's government went on a spending spree after his surprise 2005 election victory, lavishing credit and cash during frequent provincial trips to help the needy.

During a typical visit to the northwestern province of Qazvin in May, his government announced 160 local development initiatives from roads and water supply to sports facilities.

The politicians seeking to deny him a second term accuse him of "charity" economics and of trying to lure voters with handouts, such as much-publicised distribution of "surplus production" potatoes in different locations earlier this year.

Former Prime Minister Mirhossein Mousavi, seen as Ahmadinejad's main moderate challenger, says this offends people's dignity without addressing the root causes of poverty.

"Still growing"

Among voters in the capital, home to more than 15 per cent of Iran's rapidly urbanising population of more than 70 million, economic frustrations tend to overshadow Iran's nuclear dispute with the West, even though the conservative president's rivals say his defiance hurts the economy by isolating the country.

Inflation may have come down from last year's 30 per cent peak, reaching an annual 18 per cent in March, but many Iranians say they still struggle to afford food and other basic items.

Government critics also argue that free-spending policies while oil prices were soaring left the world's fifth-largest crude exporter vulnerable to the tumble that started in 2008.

Despite a sharp recovery this year, crude remains below $75 a barrel, the level at which the International Monetary Fund last year said Iran would show current account deficits.

Ahmadinejad, who vowed during the 2005 campaign to share out Iran's oil riches more fairly, blames double-digit inflation on global food and energy prices which peaked last year, and has replaced a central banker who tried to rein in monetary policy.

He says the oil-dependent economy, with a Gross Domestic Product of around $360-370 billion according to IMF projections last year, is still showing annual growth of 5-6 percent and doing much better than those of Iran's Western foes.

"There is negative growth everywhere you look ... but in Iran the growth rate is positive," he said in May. Last year, he said Iran could manage for three years on its foreign exchange reserves even if the oil price "reaches zero."

A Western diplomat said the global economic downturn may have come later to Iran, but it faces growing problems as a result of an oil price fall of nearly 60 per cent over the last year, w