Stuart Levey, the Treasury's undersecretary for terrorism and financial intelligence, said targeted financial sanctions against Iranian state banks and other institutions were having some effect in contributing to discontent among Iranians.

"The private sector is our best ally in this struggle," Levey told the American Jewish Committee in Washington.

"Particularly in the banking sector, what we've seen is banks around the world going well beyond what their legal requirements are because they don't want be involved in illicit conduct, they don't want to handle the business of terrorists, they don't want to handle the business of proliferators, they don't want to handle the business of drug dealers," Levey said.

The United States and some of its allies suspect Iran of using its civil nuclear program as a cover to develop atomic bombs. Iran says its program is only to generate electricity so it can export more of its oil and gas.

The Treasury has blacklisted a number of Iranian firms that it says are linked to its nuclear program or to providing financial support for terrorists, including four state banks.

Levey said Iran's central bank was continuing to request that names of Iranian companies be taken off of transactions to try to skirt the sanctions, but he declined to say whether the Treasury would ban dealings with the central bank itself.

"We don't talk about what we might do," he said after his speech. "What we've seen is the central bank of Iran engaging in deceptive practices. Engaging in conduct that I've described about pulling the names off of transactions, trying to help companies and banks that are designated evade the sanctions and that's something that international banks should be briefed on so they can consider it. It's an important development."

Levey said there was growing discontent among Iranians over mismanagement of the economy and spiraling inflation, citing recent criticism of President Mahmoud Ahmadinejad's handling of the economy by Ali Larijani, a parliamentarian who was Iran's former nuclear negotiator.

Financial sanctions could squeeze badly needed investments in Iran's critical oil sector, he said.

On Friday, major powers have agreed to make a new offer of incentives to Iran to halt its sensitive nuclear work.

But Levey said some European allies might lose faith in the effectiveness of sanctions if Iran continues its uranium enrichment program.

"I am worried about whether there will be the political will to keep going," Levey said.