By Fredrik Dahl
Ahmadinejad, who is expected to seek a second four-year term in the June 12 vote, had accused the legislature of violating the constitution by removing a key plank of his plan to reform Iran's system of hefty subsidies from the budget proposal.
But influential Speaker Ali Larijani rejected Ahmadinejad's criticism and Iranian media said the Guardian Council, which vets laws to ensure they adhere to Islamic principles, backed the amended budget bill on Tuesday.
MPs argued that the subsidy reform would further stoke inflation, now running at more than 20 percent annually, at a time when the world's fourth-largest oil producer is facing declining revenue from its crude exports.
Ahmadinejad had wanted to raise energy and utility prices and compensate low-income families with direct cash payments.
"From a political point of view, Ahmadinejad lost the battle of the budget," said Saeed Laylaz, editor of the Sarmayeh business daily and an outspoken critic of the government. "But I'm not sure it is over yet."
The dispute has highlighted objections to Ahmadinejad's economic policies from fellow conservatives such as Larijani, who said the president was interfering in parliamentary affairs.
ECONOMIC BATTLEGROUND
The Guardian Council approved the bill on the same day that moderate former president Mohammad Khatami withdrew from the presidency race to avoid splitting the reformist vote, throwing his weight behind former prime minister Mirhossein Mousavi.
Ali Ansari of the University of St Andrews in Scotland said the economy was Ahmadinejad's "vulnerable point" and that his reformist opponents saw it as the election's main battleground.
"They have decided it's the economy, stupid, and that's what the election will be fought on," Ansari said, adding Mousavi was stronger than Khatami on such issues.
Critics 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.
Analysts say the outcome of the election could hinge on whether Ahmadinejad retains the support of Supreme Leader Ayatollah Ali Khamenei, Iran's top authority, who has publicly praised the president.
Laylaz said the budget vote showed that Ahmadinejad, who came to power in 2005 pledging to share out Iran's oil wealth more fairly, had been weakened politically.
But Ebrahim Hosseini-Nasab, an economics professor at Tehran's Tarbiat Moddares University, said the government could re-submit its reform proposal in a supplementary bill and that a compromise with parliament was still possible.
The president argues his subsidy reform plan would help "implement justice and remove discrimination", and that change is more urgent now crude has fallen by around $100 a barrel from July's peak of $147, hitting Iran's main source of revenue. (Additional reporting by Parisa Hafezi in Tehran and Alistair Lyon in Beirut; Editing by Charles Dick)
