Stalls were shuttered in the capital's main bazaar, an AFP correspondent said, with policemen in uniform and plainclothes patrolling the area. The main gate remained closed and shoppers left empty-handed.

It is the first general strike at the bazaar since the revolution. The shutdown started in jewellery shops on Wednesday then spread to textile and carpet stalls, reaching its height on Sunday.

"Because of this tax (VAT), there is an increase of 10 to 15 percent in prices, so we want the government to annul the law," a shopkeeper standing by his closed business said.

The government last month introduced value added tax at a rate of three percent but traders say the effective rate will be higher because the levy will be imposed at every stage of the supply chain, from producer to consumer.

"By closing our shops we are losing money for a few days but if we do not succeed we will lose money for ever," another bazaari said.

"I hope the bazaaris win and not the government, since I would be purchasing things more expensively because of the new tax," said a dissatisfied consumer.

VAT came into force on September 22, but after press reports of strikes last week in the provincial cities of Isfahan, Mashhad and Tabriz, Ahmadinejad on October 9 ordered a two-month freeze.

Ahmadinejad in a letter to his Economy Minister Shamseddin Hosseini said the reason for the suspension was "to remove the obstacles and problems facing the correct execution of the law."

"We believe this law (VAT) should be implemented but there must be enough time for a briefing. We demand a year or at least six months of suspension," the head of Tehran's business and production assembly, Mohammad Pour Mazraeh, told the labour news agency ILNA.

Iran's Commerce Minister, Masoud Mir-Kazemi said it is up to parliament to scrap the VAT law.

"The guilds are looking for ways to annul this law, but the government cannot decide on its cancellation, it is the duty of the majlis (parliament) to decide on it," Mir-Kazemi was quoted as saying by Mehr news agency.

"In Iran the officials (government), the majlis and people interact with one another and this issue can be solved through talks," he added.

Rises in retail prices have accelerated since Ahmadinejad took office in 2005. In September, the cost of a basket of 45 staple food items was up 50 percent on a year earlier, press reports said.

Annual inflation topped 29 percent in the Iranian calendar month that ended on September 21.

"Inflation of around 30 percent has to manifest itself in one way or another. This strike is a sign of the dissatisfaction of the middle class with the economic policies of Ahmadinejad," economist Saeed Leylaz told AFP.

A senior Iranian businessman sees the bazaaris' move as a protest against the government's economic policies in general.

"This movement goes beyond union demands," said Mohammad Reza Behzadian, former head of Tehran's chamber of commerce and industry.

"This government has made its decisions without ever considering the opinion of economic experts and businessmen. It is a normal reaction to this attitude."

Iran's bazaaris play an important political as well as economic role. The merchants contributed to the collapse of the shah's regime during the 1979 Islamic revolution when they went on long strikes.

© 2008 Agence France-Presse