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Turkey is seeking to switch to payments in national currencies for $10 billion worth of trade with neighbouring Iran to lessen exchange rate risks and bolster trade volumes, a Turkish government source said on Friday.

Turkey has made similar proposals to China and Russia in recent months.

Iran proposed earlier this week during a visit by Turkish Prime Minister Tayyip Erdogan that the two countries should conduct bilateral trade in their own currencies as part of widening economic ties.

Bilateral trade jumped to $10.3 billion in 2008 from $2.4 billion in 2003, with Turkey running a large deficit largely due to its gas imports. Ankara and Tehran aim to boost the volume to $20 billion in the next few years.

Such efforts to expand ties may cause concern in Washington, a key ally of Turkey. The United States is embroiled in a long-running row with Iran over Tehran's disputed nuclear programme.

Iran, the world's fifth-largest oil exporter, is Turkey's second-biggest supplier of natural gas, after Russia.