Mahmoud Ahmadi-Nejad, the Iranian president, is being drawn into a scandal over a $2.8bn bank fraud allegedly perpetrated by his political allies.

The alleged fraud, described as the biggest in the country’s history, is an embarrassment for Iran’s populist president, who swept to power in 2005 on an anti-corruption platform. It comes against the backdrop of an intensifying power struggle between Mr Ahmadi-Nejad and his allies and conservatives supporting Ayatollah Ali Khamenei, the supreme leader.

The president was implicated in a letter printed by Iranian news agencies last week, in a move widely seen as an attempt by Mr Ahmadi-Nejad’s political opponents to weaken him and his allies ahead of parliamentary elections in March and a presidential poll in 2013.

The fraud allegations centre on Amir Mansour Khosravi, a businessman whose wealth was largely confined to ownership of a mineral water factory a few years ago but who has since become a multi-billionaire. Mr Khosravi is alleged to be a front man for the business interests of Esfandiar Rahim-Mashaei, the president’s chief strategist and head of the president’s office.

Mr Khosravi allegedly forged letters of credit from the partially state-owned Bank Saderat and gave them to seven other Iranian banks. It is claimed this helped him get credit to fund his businesses and try to buy two government-owned factories, including Khuzestan Steel Company, one of the country’s biggest, under a privatisation plan.

Iranian news agencies printed a letter attributed to Mr Mashaei urging two ministers to cede about half of the shares of the steel company to Mr Khosravi’s company with “the agreement of the president”.

The government has denied any links to the alleged fraud.

Mr Khosravi’s assets are reported to have been frozen and on Sunday Shamsoddin Hosseini, the minister of the economy, said he had been arrested. No official at the steel company was available for comment.

Tehran Emrooz, a daily newspaper close to conservative supporters of Ayatollah Khamenei, has alleged that Mr Khosravi has smuggled most of the allegedly embezzled funds out of the country.

Some senior government figures, notably Mr Mashaei, are alleged to have formed a circle of affiliated businessmen and bankers by granting them special advantages, such as large loans, in return for election funding.

“The new [allegations are] related to the next elections and efforts by conservatives to stop the financial channels which feed the campaign of Ahmadi-Nejad supporters,” said one former official.

The battle between Mr Ahmadi-Nejad and Ayatollah Khamenei became public in May, when the president insisted on sacking the intelligence minister, Heydar Moslehi, against the supreme leader’s will .

Analysts believe the dispute is rooted in the ayatollah’s view that Mr Ahmadi-Nejad should not try to control the political scene when he leaves office in 2013. It is widely believed that the president is trying to wield influence by ensuring his supporters form a majority in the next parliament and will nominate a close ally to replace him as president.

Most conservatives in parliament and the judiciary support Ayatollah Khamenei and are said to be doing their best to undermine Mr Ahmadi-Nejad’s electoral hopes without overthrowing him, at least for now.

“The opponents of Ahmadi-Nejad prefer to harm the president and his team through corruption charges, which are more damaging in public eyes than other accusations,” said one senior reformist politician.

The president vowed on Wednesday that he would speak against “the main elements of corruption”. He said anyone found guilty of corruption – even if it included those “under holy titles”, a clear reference to senior clergy said to be involved in big economic projects – must be arrested.

Some economic and political analysts privately accuse the government of being the most corrupt since the creation of the Islamic republic, mainly thanks to record oil income that is estimated to have brought in about $450bn over the past six years.

They claim government affiliates have taken billions of dollars out of the country for trade or investment in Malaysia, Turkey and Brazil, where they bought hotels and land and opened bank accounts.

In its last corruption perceptions index, Transparency International ranked Iran among the “highly corrupt” countries.

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