President Mahmoud Ahmadinejad, who still faces opposition protests seven months after his re-election in June, wants to save up to $100 billion annually from subsidies on gasoline, natural gas, electricity, water, food, health and education.
The Guardian Council's final approval of the plan came after Iranian media last week said Ahmadinejad and parliament had reached a compromise on control of the money the state is expected to save through the bill.
Removing subsidies could make Iran less vulnerable to any Western sanctions on, for example, gasoline imports over its disputed nuclear energy programme.
But critics of the plan say it would stoke inflation and could ignite social unrest, at a time of heightened tension in the Islamic state, seven months after the disputed June vote plunged the country of 70 million into turmoil.
It was not immediately clear when the bill would be implemented.
"The Guardian Council approved it in its last session," council spokesman Abbas-Ali Kadkhodai told the semi-official Fars News Agency. The 12-member body of senior clerics and Islamic jurists must approve legislation passed by MPs.
"The Guardian Council studied the amended bill which was sent by parliament … and found no contradiction with Sharia (Islamic law) and the constitution," he said.
State radio also carried the report.
MORE SANCTIONS?
Major powers are expected to meet in New York on Saturday to discuss possible new sanctions on Tehran over its refusal to halt its atomic work, which the West suspects is aimed at making nuclear bombs. Iran denies the charge.
Secretary of State Hillary Clinton said last week the United States had begun talks with like-minded nations about sanctions they might impose on Iran's government and Revolutionary Guards without hurting ordinary Iranians.
Ahmadinejad and MPs had disagreed over control of the money saved through the subsidy reform and on Jan 3. parliament rejected a government request to withdraw the bill.
The government wanted to spend the money in any area it sees fit. But the assembly passed an amendment in November linking the cut in subsidies to the budget.
Under the compromise solution reported last week, a government body would be set up to receive and spend the saved money. The government would include this body in its budget, but without giving details on its operations.
Critics believe the government's subsidy reform plan will hurt many ordinary Iranian people already struggling to cope with rising consumer prices. The official inflation rate stands at around 7 percent, down from a 2008 peak of nearly 30 percent.
State media have said the government will open bank accounts for 36 million people to give them cash to compensate for the higher food and energy prices.
Iran has been rocked by anti-government protests since the June election, which the opposition says was rigged to give Ahmadinejad a second term.
The vote touched off the worst internal crisis in the Islamic Republic's 30-year history. The government denied any fraud in the voting.
(Additional reporting by Ramin Mostafavi; Writing by Fredrik Dahl; Editing by Ruth Pitchford)
