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UPDATE 1-Turkey-Iran central banks agree to trade in local currencies - Turkish PM

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ISTANBUL, Oct 19 (Reuters) - Turkey and Iran's central banks have formally agreed to trade in their local currencies, Prime Minister Binali Yildirim said on Thursday in a move aimed at increasing bilateral trade.

Under the deal, the Iranian rial and Turkish lira will be easily converted to help reduce the costs of currency conversion and transfer for traders. The countries had been using euros.

"Trading with local currencies is the most significant step to improving economic ties. The central banks of both countries agreed on this issue and they will inform other banks about how the deal will be applied," Yildirim told a joint news conference with Iran's First Vice President Eshaq Jahangiri.

"Trading in local currencies will be encouraged and this will contribute to making trading easier and increase the trade volume and diversity," Yildirim added.

Earlier this month, Turkish President Tayyip Erdogan said the deal was aimed at raising Turkish-Iranian trade volume to $30 billion from current $10 billion.

The deal is in line with Iran's efforts to dodge unilateral U.S. sanctions, which remain intact despite the lifting of international financial sanctions on Tehran last year under a 2015 nuclear deal between Iran and six major powers.

U.S. banks are still forbidden to do business with Iran.

European lenders also face major problems, notably with rules prohibiting transactions with Iran in dollars - the world's main business currency - from being processed through the U.S. financial system.

Iran has secured banking ties with only a limited number of smaller foreign institutions as major foreign banks are wary of the U.S. sanctions.

"This is an important step to expand the level and volume of trade cooperation between Iran and Turkey," Jahangiri told the joint news conference.

(Writing by Ezgi Erkoyun; Additional reporting by Parisa Hafezi; Editing by Ece Toksabay and Alison Williams)

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