Dec. 7 (Bloomberg) -- Iran's government shut down the capital Tehran for two days as pollution levels reached a record and smog clouds cloaked buildings including the city's 435-meter high Milad television communications tower.

The two-day public holiday has closed schools and government departments, including the Ministry of Oil, which manages the world's second largest crude reserves, and private companies until Thursday evening, the government announced on state television. It was the first such shutdown. Tehran Police extended a zone where only cars with specific permits can drive.

Iran's capital is one of the world's most polluted cities due to permanent traffic jams fueled by cheap gasoline and lack of public transport. The city's 12 million residents own 2 million vehicles and inhale as many as 9 kilograms of polluted dust a year, local studies show. With one of the world's fastest growing populations over the last two decades, the Islamic Republic has struggled to build the required infrastructure.

This will damage the private and public economy further, at a time when the business climate is already difficult,'' said Hajir Hakim Hashemi, general manager of Roxanne Kish, an Iranian importer of European cosmetics with staff in Tehran.Not only the people, but the economy needs to breathe.''

Oil and gas production is unlikely to be disrupted since the break only applies to Tehran, where none of the fields are located. No one was available at Iran's Oil Ministry to comment.

Offices Close

The Tehran offices of most foreign oil and gas companies, including Eni SpA of Italy, Statoil ASA of Norway and Royal Dutch Shell Plc, will be closed until Saturday. Friday is a day off in Iran.

The price of crude oil in New York rose for a sixth day to $60.36 at 12:25 p.m. London time, the longest rally since Hurricane Katrina pushed prices to a record above $70 in August.

Iran's Pollutant Standards Index (PSI) reached 160 over the past few days, compared with 56 in New York City and 16 in London today. The air is considered unhealthful'' if the index value stands between 100 and 200.

Tehran had over 100 days of unhealthy air pollution over the last year, according to official figures.

Short-Term Solution

It's a good short-term solution, as it's better to have people stay home rather than be off sick later,'' said Ali Ghezelbash, associate director at Tehran-based Atieh Bahar Consulting.If it becomes a regular pattern though, we will have to sit down and come up with something more solid.''

Iran already has 30 public holidays a year, one of the highest rates in the world. One or two more won't have a dramatic effect, the consultant said.

Visibility in the capital of 12 million has been poor for one week because of thick smog, made worse by a total lack of wind in the capital.

Yesterday, an Iranian military transport plane carrying 94 people, many of them journalists, crashed in a residential area in the south of Tehran as it was attempting to return to the city's main airport following technical problems. In total, 108 people died, including all on board.

Gasoline is heavily subsidized in Iran, contributing to the country's pollution as well as to gasoline smuggling toward Pakistan and Afghanistan. A 40-litre tank costs the equivalent of $4.

Cheap Gasoline

The only solution is to increase gasoline prices up to the level of neighboring countries, said Saeed Laylaz, a political and economic analyst in Tehran.Otherwise, we will continue to lose our health, our money and growth opportunities.''

Iran will spend $10 billion on gasoline subsidies and imports by the end of the Iranian fiscal year in March 2006, Kamal Daneshyar, who heads the parliamentary Energy Commission, said in October.

Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries, imports more than a third of its gasoline. It plans to invest $17 billion over the next 10 years to boost its refining capacity.

Iran also eliminated production of the gas-guzzling Paykan car, owned by four out of every 10 Iranians. Paykans, a descendant of Britain's Hillman Hunter whose production in Iran started 32 years ago, uses as much as 17 liters (4.5 gallons) of gasoline per 100 kilometers (62 miles).

Some 1,250 additional vehicles hit Tehran streets each day, Tehran Mayor Mohammad-Bagher Qalibaf, told the Tehran Times today.

Public transport is under-developed with just two underground metro lines operating so far.