By Mohammed Abbas

NAJAF, Iraq, Sept 30 (Reuters) - In the holy Iraqi Shi'ite city of Najaf, Iranian tourists throng the streets, speak to shopkeepers in Farsi and pay in Iranian money. Farsi chants blare from speakers at a nearby shrine.

The scene would probably horrify both the United States and Iraq's Sunni Arab neighbours, who suspect Shi'ite non-Arab Iran of nefarious and subversive influence in Arab lands. Even some of Najaf's citizens are wary of Iranian leverage.

But the city, a centre of religious and political power in Shi'ite-majority Iraq, benefits from Iranian tourism and aid.

The uniforms of rubbish men sport Farsi inscriptions, as do their gleaming new Iran-donated rubbish trucks. Iranian builders toil at the site of a new Iranian-sponsored hospital.

Iranian donations pay for the renovation of Shi'ite holy sites, and Iran has offered cash and expertise to boost electricity capacity in Iraq's Shi'ite south.

Each year hundreds of thousands of Iranian pilgrims visit Najaf's shrine of Imam Ali, one of the most important figures of Shi'ite Islam.

Najaf officials, up for re-election in provincial polls expected early next year, play down Iranian influence.

"Do you see Iranian councillors? Iranian police? ... There is no influence at all," Najaf provincial governor Assad Abu-Gelal said in a recent interview in the southern city.

But ordinary residents say Iranian influence is there, and they don't necessarily mind.

"There's an Iranian hand in Najaf, but it's a positive hand. They've help develop the city, the hospital, the tourism," said Hussein Abbas, who works in a Najaf toy shop. The province's current administrators will get his vote in the provincial elections, he added, despite the whiff of Iranian backing.

SWORN ENEMIES

Iraq and Iran were sworn enemies under Saddam Hussein, a Sunni Arab dictator who launched a ruinous eight-year war with Shi'ite Iran in the 1980s in which 1 million people died, many Iraqi Shi'ite conscripts.

But since U.S. troops overthrew Saddam in 2003 and a Shi'ite led-government came to power in Baghdad, Iran has conspicuously shown off its clout, partly through its ties with Shi'ite politicians and parties that were based in Iran for years during the rule of Saddam.

In March this year, President Mahmoud Ahmadinejad made a triumphant visit -- becoming not only first Iranian leader to visit Iraq since the 1980s, but also the first regional head of state to visit since the U.S.-led invasion.

Iran has had a full-service embassy in Baghdad for years, while no Sunni Arab state had an ambassador in the Iraqi capital for three years until this month.

Washington -- Tehran's arch enemy for 30 years -- accuses Iran of supplying Shi'ite militants in Iraq with arms, training and cash, accusations Tehran denies.

Almost all of oil-rich southern Iraq's provincial councils, including Najaf, are dominated by the Supreme Islamic Iraqi Council (ISCI), a Shi'ite political group formed in exile in Iran during Saddam's reign.

Many Iraqis, including Shi'ites, say ISCI is still backed by Iran. Yet ISCI is also a key part of Iraq's U.S.-backed government, and strongly denies Iran directs its policies.

"ISCI was in Iran. And from Iran we went to Washington. Iran has no ties to America. It's at political war with it," said Najaf deputy governor and ISCI member Abdul Hussain Abtan.

"We allow for good relations with Iran, but built on mutual respect, and not interfering in each other's affairs."

CLEAR AS THE SUN

Iraqis bristle at the prospect of their politicians taking Tehran's orders.

"We love the tourists, but if (Iran) tries to take part in politics, we'll fight it. And it is clear as the sun that they are," said Karar Kadham, sitting outside the Imam Ali shrine.

But he praised ISCI's leadership in the city and predicted most Najaf residents would vote to keep the party in power.

Majid Ali, a clothes shop owner, was careful to distinguish between Iranian cultural and political influence, saying Najaf city has had trade and religious links with Iran for centuries.

But he said he would not vote in local or national polls because Iraq's political leadership was "constrained" by Iran.

"Iran's aim is clear. To counter U.S. influence. They're facing the United States and the Arabs on the Iraqi stage," he said, before breaking off for a phone call in Farsi.

Ali Abshar, an Iranian pilgrim in Najaf, said he felt comfortable in the city, and that it was just like the Iranian city of Qom, Shi'ite Islam's other main seat of learning. He had no hard feelings over U.S. demonisation of his country.

"Americans came and got rid of Saddam," he said, holding two thumbs up and grinning.

(Editing by Peter Graff and Samia Nakhoul)

AlertNet news is provided by