A committee of Iranian lawmakers has rejected a government plan to increase prices for subsidised food and fuel in a move that threatens to derail a drive to rein in the country's sanctions-squeezed budget.
International sanctions imposed over Iran's nuclear programme have sharply reduced the amount of money Tehran earns from oil, upping pressure on President Mahmoud Ahmadinejad to push through cuts in government spending worth tens of billions of dollars by scaling back subsidies for the population.
But a parliamentary committee examining this year's budget - which the overall parliament has yet to approve - rejected the size of the proposed cuts, setting the stage for a possible compromise deal that could force the government to sign up to far less ambitious cost-savings.
"The Majlis [parliament] may agree to raise energy prices to some extent, but far less than the administration has requested," the parliament's integration committee said, according to the Mehr News agency.
The committee approved just 560 trillion rials (Dh168 billion) for the programme, less than half the amount the government wanted to add to its coffers thanks to subsidy savings, parliament's news agency reported.
That is the same amount allotted in 2011.
The government implemented the first-stage of its Targeted Subsidies Plan towards the end of 2010 in an attempt to wean the country off more generous food and fuel subsidies. At the time, Mr Ahmadinejad called it the "biggest economic plan of the past 50 years".
But the next phase of the plan needs the parliament's approval before it can be implemented at a time when the makeup of parliament appears to be changing in favour of Ahmadinejad's conservative critics.
Prices have spiralled since the reforms were first introduced, causing serious financial problems for millions of people across the country. The price of petrol has risen three-fold and the cost of gas has soared by 500 per cent.
Critics of the plan have accused Mr Ahmadinejad of pushing through a programme of wasteful public spending that has caused soaring inflation and of using the reforms for his own political gain.
The parliamentary speaker Ali Larijani - a fierce critic of the president - said the government was now planning to triple petrol prices and to double the cost of natural gas, Mehr news reported on Friday.
Last month, the government said it would boost the monthly cash payments it gives to its poorest citizens to offset the rising prices by more than 50 percent to 730,000 Rials (around 60 U.S. dollars).
Ahmadinejad wanted to introduce the second phase of his subsidy reform programme last month but hostile MPs say the additional payments have not been approved and are illegal.
In a New Year speech, Ayatollah Ali Khamenei gave his backing to the reforms which he said were an important means of distributing welfare in a more balanced way.
The International Monetary Fund has commended the Iranian government for the policy which it said had led to a reduction in fuel consumption and inflationary pressure.
The reforms coincide with tightening external pressure on Iran's economy caused by harsher sanctions imposed by the United States and its allies early this year.
The embargoes target Iran's banking and energy sectors and have resulted in a dramatic devaluation of the rial since January.