When a Western bank suddenly suspended the account of her family freight firm, Nazila Noebashari revived a financial practice she thought long gone: she sent staff to the Afghan border to collect $50,000 by hand.

With foreign banks increasingly closing down business with Iranian customers in the face of U.S.-led sanctions, such physical transactions are the only way Traf Co Ltd and many other firms in Iran are staying in business.

"As an Iranian-based company we can't have a foreign currency account anywhere in the world," said Noebashari, who runs the transport company that was established in the 1930s and is now facing some of its biggest obstacles in seven decades.

"We have to go back to old traditions of carrying cash around," she told Reuters. "Carrying $50,000 in cash to any border these days is one of the biggest risks you can take -- both for the company and the employees doing it."

The prospect of thousands of dollars ferried around an area such as Afghanistan, earmarked by Washington as a hunting ground for terrorists, can scarcely delight Western security services. But this side-effect of sanctions is food for the thought of politicians rather than businessmen.

Noebashari's experience shows how Western punitive measures imposed on the Islamic Republic over its disputed nuclear activities are making it increasingly difficult to conduct business in the world's fourth largest oil producer.

Other Iranian executives, often reluctant to use their names, cite mounting problems in obtaining finance from abroad for imports, rising interest charges on the credits they do obtain and growing wariness among European and other partners.

One Iranian trader said equipment for a university listed as "laboratory" items -- for an arts rather than science department -- took 10 weeks to get an export permit to Iran from a European state, compared with the usual two.

"CREATIVE"

Another businessman cited problems obtaining equipment for his detergent plant, saying it was barred on suspicion it might have a "dual use", meaning it could have an application in Iran's nuclear program. He was baffled what that could be.

A construction executive showed Reuters offices in a new building in Tehran. He built it with plans to expand, but some of the floors are now empty looking for tenants.

He has opted to investigate projects in Dubai, a regional financial and commercial centre, where others are also seeking to open offices to skirt problems of doing business from Iran.

They are paying the price for a U.S.-led drive to isolate Tehran over atomic work Washington suspects is aimed at making bombs. Iran denies this, saying it wants to generate electricity to export more gas and oil.

Life may get tougher still. The United States is now seeking a third round of United Nations sanctions and is also putting pressure on Western companies not to invest in Iran.

Major banks including Switzerland's UBS and Germany's Deutsche Bank have decided to either cut all ties or reduce their dealings with the country.

"They are between doing nothing and doing very little," said one international banking source of foreign banks in Iran.

Western businessmen also complain of growing problems in Iran as a result of the nuclear standoff. The cost of issuing letters of credit, a crucial instrument in financing trade, has risen sharply over the last year.

One Western executive suggested some larger Iranian firms were still able to find alternative ways of financing projects and transferring cash in and out of the country. Bankers say some non-Western banks are more ready to deal with Iran.

"Iranian businessmen are probably among the world's most creative. They have been under sanctions for 30 years," he said.

"UNFAIR"

But Noebashari, who succeeded her father as managing director of the family firm, said times were getting desperate after Standard Chartered cancelled the firm's account in Dubai.

"We get a letter on July 27 saying that by August 2 all your transactions will be stopped," she said, sitting behind a plain wooden desk with her hair covered by the traditional Muslim headscarf. "It is unfair, it is unprofessional."

She showed a copy of a letter with the British bank's name on it. Standard Chartered in Dubai had no comment.

Traf Co Ltd was set up by Noebashari's grandfather when Iran was a monarchy. She says it is now going through its most difficult time since the 1980-88 Iran-Iraq war.

"In six months I close down if it goes on like this."

Iranian officials brush aside the impact of sanctions, saying the economy is growing strongly and foreigners still invest, even if unemployment and inflation are in double-digits.

Boasting the world's second largest gas and oil reserves, Iran remains a coveted prize for international oil companies. But Royal Dutch Shell and Total have both indicated political tension could influence investment plans.

French Foreign Minister Bernard Kouchner, saying his country should prepare for the possibility of war against Iran, on September 16 urged French firms not to bid for work there. European Union officials say new EU investment in Iran is dwindling.

French auto maker Renault, building its Logan no-frills car in Iran with local partners, has said demand is strong but the ramp-up of production slow for two reasons -- there were customs problems with some parts coming from Romania and some quality problems with Iranian parts.

Despite signs of growing economic woes, Noebashari said sanctions would not change the policies of Iran's government -- which has made windfall gains from high oil prices in recent years -- just as sanctions failed in Iraq in the 1990s.

"A second Iraq is going to be created where people of the country will suffer more than the regime," she said.

She said her company, which employs 32 people, had lost business both in the United States and in Afghan reconstruction projects as a result of sanctions.

"The Pakistanis have been taking lots of freight away from Iran because the minute our name is mentioned, especially with Americans paying for the jobs, we lose a contract," she said.

(Additional reporting by Marcel Michelson)

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