TEHRAN (Reuters) -- Iran's parliament has voted against a key plank of President Mahmud Ahmadinejad's subsidy reform plan, dealing him a potential blow ahead of a presidential election in June.
In what may be another sign of political trouble for the conservative president, a prominent rival comfortably defeated one of Ahmadinejad's backers and was reelected as head of a powerful clerical body, the Assembly of Experts.
The assembly vote followed parliament's decision on March 9 to throw a clause out of the 2009/10 budget bill that would overhaul Iran's system of hefty subsidies.
Critics say the government's plan to hike energy and utility prices and compensate low-income families with direct cash payments would only add to double-digit inflation at a time of plunging oil prices and growing economic woes.
They accuse Ahmadinejad of squandering the windfall oil revenue Iran earned when crude prices were soaring, leaving it more vulnerable in times of need, such as now.
"The bill would intensify existing stagflation," said the head of parliament's energy committee, Hamid-Reza Katuzian, quoted in the newspaper "Kar-va-Kargar."
Ahmadinejad argues his plan would help "implement justice and remove discrimination," and that change was needed more urgently now crude has fallen by around $100 a barrel from July's peak of $147, hitting Iran's main source of revenue.
But a group of Iranian economists this week said the plan was against Iran's interests and urged the assembly to reject it.
A Western diplomat said the parliamentary vote was a setback for the government, but that it may be temporary.
"I think we are going to look at some form of compromise over the next couple of weeks," he said.
Ahmadinejad, who came to power in 2005 pledging to share out Iran's oil wealth more fairly, plans to run for a second four-year term in the June 12 election, despite growing criticism of his economic management.
His main rival is expected to be reformist, former President Mohammad Khatami, who oversaw a thaw in relations with the West during his 1997-2005 tenure. Ties have deteriorated again under Ahmadinejad, partly because of his fiery anti-Western speeches.
In the Assembly of Experts vote, former President Akbar Hashemi Rafsanjani, who is a critic of the government's economic policies and wants better ties with the West, saw off a challenge from Ayatollah Mohammad Yazdi, an ally to Ahmadinejad, the news agency ISNA said.
Rafsanjani, who won the assembly ballot by 51 ballots against 26 for Yazdi, lost to Ahmadinejad in 2005. He is not expected to seek the presidency again, but he remains an influential political voice in the Islamic republic of Iran.
"It shows that members of the Assembly of Experts are worried about the country and Ahmadinejad's policies. That is why they voted for Rafsanjani, who has more moderate stances," said one Iranian analyst, who declined to be named.
The assembly is an 86-seat body with the power to appoint, supervise, and even dismiss Iran’s highest authority, Supreme Leader Ayatollah Ali Khamenei. In practice, the assembly is not known to have ever challenged Khamenei.
Another political analyst in Tehran said Ahmadinejad "is not doing very well," but he doubted squabbling over subsidy reform would have a major impact on the election campaign.
Analysts say the outcome of the vote could hinge on whether Ahmadinejad retains the support of Khamenei, Iran's top authority, who has publicly praised the president.