Standing next to piles of exquisitely hand-woven Persian carpets, Hossein Ghaseminia is confident his rugs, which cost up to $50,000, can see off cheaper Asian rivals and ride out threatened U.S. sanctions.

One of Iran's best-known exports, Persian carpets made from silk, wool and cotton are traditionally by women in villages, who use natural dyes derived from plants to color them in rich hues where red, brown and cream dominate.

"If we produce high-quality carpets people will continue to buy them," said Ghaseminia, who has been more than four decades in the business which is one of Iran's main export earners besides oil.

Selling outside Iran mainly to the United States and Germany, the Persian carpet is also deeply ingrained in the country's national identity. Rugs adorn the floors of most homes and with prices for finer examples reaching many thousands of dollars, they are, for some people, an investment.

But a half-empty hall at the annual Persian Carpet Grand Exhibition last month showed the business facing tough challenges, both at home and abroad.

Drinking tea and talking shop in the midst of thousands of carpets from different parts of Iran, dealers in various types of rugs accused low-cost producers from India, Pakistan and China of copying elaborate Iranian designs.

While Iran remains ahead at the most expensive end of the market, its overall position in the $10 billion global industry -- which also includes machine-made carpets -- has slipped five places to number eight since 2001, with Belgium on top.

Trader Ata Erad said sales were better last year, but insisted there was no crisis.

"The carpet is part of life, as necessary as air and water," Erad said, displaying both old and new wares.

"Carpets are like gold in Iran," he added, proudly showing a 50-year-old specimen from the northwest, measuring 24 sq meters, which he said had trebled in value to nearly $70,000 in a year.

But other dealers said raw material and wage costs had risen sharply, forcing them to hike prices: that has deterred some buyers.

"Business is not good," Ali Mohammad Zadeh said in the stand of his family firm laden with rugs with traditional motifs including different flowers and vines, animals including birds and deer, and geometrical patterns.

Unlike previous years, wealthy buyers from Iran's Arab neighbors and elsewhere had not shown up, he said: "We have not even made enough money to pay for the rent. It would have been better to stay in the bazaar."

U.S. SANCTIONS THREAT

Potentially making matters worse is a threat of renewed U.S. sanctions, which would directly affect a big market.

As part of U.S. efforts to pressure the Islamic Republic to halt its sensitive nuclear work, proposed new legislation would reimpose a total ban on Iranian imports.

The bill, sponsored by California Democrat Tom Lantos, would reverse a "goodwill gesture" by former President Bill Clinton in 2000 that allowed in rugs, and certain other goods, from Iran.

The draft, which won overwhelming approval from a congressional committee in June, would also force President George W. Bush to impose sanctions on energy firms dealing with Iran. The measure still needs approval by the U.S. Congress.

Iran's carpet exports amounted to $635 million in 2005, according to the latest figures from the state-owned Iran Carpet Company. Most are top-notch hand-woven products.

But Jalal Eddin Bassam, managing director of the Iran Carpet Company, insisted U.S. buyers would be able to circumvent any import ban.

He said past experience indicated such punitive measures would not have a major negative impact on an industry which boasts a tradition dating back 2,500 years and, directly or indirectly, employs 1.4 million people in Iran.

The Persian carpet would "find its way" into the United States, he said at company headquarters in downtown Tehran.

"People prefer to buy expensive Persian carpets rather than cheap Indian or Pakistani carpets in America," he said.

During previous sanctions customers bought Iranian carpets elsewhere before taking them home to the United States.

"They do it -- we don't do it -- we don't do anything wrong," Bassam said.

In July his firm unveiled what it said was the world's largest hand-woven carpet which, at 5,600 sq meters, was designed for a large mosque in the United Arab Emirates.

Containing more than 2 billion knots, it took weavers two years to make and is reportedly valued at $5.8 million.

People at the fair scoffed at the idea of rugs which are not made by hand from natural materials and dyes.

"Machine-made carpets are an insult to the Persian carpet. I hate them," one dealer said.

And for some carpet buyers at least, money does not seem to be an obstacle: "They are not expensive if you think of the amount of work that has been put into them," said Nasrin Moghaddam, looking for a new rug together with her young son.

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