Iran's Parliament passed a bill on Sunday that would cut energy subsidies to make the country less vulnerable to international sanctions over its disputed nuclear programme, the official IRNA news agency reported.
The bill needs to be approved by the hardline watchdog body, the Guardian Council, before being implemented. The parliament is still discussing other parts of the bill, including cutting food subsidies.
Subsidies have placed a heavy burden on Iran's budget, and the government of President Mahmoud Ahmadinejad, who was re-elected in a disputed presidential vote in June, wants to increase energy and utility prices and compensate low-income families with direct cash payments.
The authorities say hefty fuel subsidies mainly benefit the wealthy, not the poor, but critics of the bill say it would increase inflation, now running at about 13 percent annually after a peak of nearly 30 percent a year ago.
Iran, the word's fifth-largest crude oil exporter, has said it will need an additional $6.5 billion from the budget to cover fuel imports during the fourth quarter this year and the first quarter next.
Cutting subsidies could eat into demand and lower the need for imports, depending on how far Iran drives up the price. Higher prices could also make smuggling Iranian gasoline less profitable and in the longer term improve vehicle efficiency.
Iran's conservative-dominated parliament in March removed the subsidy reform plan from the country's 2009-10 budget bill.
Ahmadinejad accused parliament then of "violating the constitution".
Iranian motorists have enjoyed some of the cheapest petrol in the world, but the government introduced rationing of heavily subsidised fuel two years ago as part of plans to cut energy subsidies.
Natural gas and electricity consumption are also subsidised by the state. Analysts fear implementation of the bill may outrage ordinary Iranians, who already suffer from high inflation and unemployment.
Iran lacks sufficient refining capacity to meet its domestic fuel needs and has to import up to 40 percent of its gasoline requirements, burdening state coffers.
The U.S. and its European allies are exploring ways of targeting fuel exports to Iran if it continues to press on with its uranium enrichment work, which the West fears is a cover to build bombs.
Iran has been hit by three rounds of United Nations sanctions over the nuclear programme, which the government says is just for energy purposes.