* Iran plans to start blending methanol with gasoline
* Domestic airlines must pay cash for jet fuel (Adds methanol blending, jet fuel plans)
By Daniel Fineren and Yeganeh Torbati
DUBAI, Nov 14 (Reuters) - Iran plans to ration diesel sales, mix gasoline with methanol to make it go further and accept only cash from domestic airlines for jet fuel, its oil minister said, as it seeks to manage stretched fuel supplies.
The value of the Iranian rial has dropped against the U.S. dollar this year as Western sanctions have slashed oil exports, making subsidized diesel smuggling more attractive, fuel imports more expensive and bank transactions difficult.
Since December 2010, Iran already has successfully cut demand for gasoline by introducing smart cards to control Iranian motorists' use of the heavily subsidised fuel.
Now owners of heavy goods vehicles too will soon have their diesel rationed, Oil Minister Rostam Qasemi was quoted as saying by Iranian oil ministry news service Shana on Wednesday, as Tehran tries to stem a surge in fuel smuggling across Iran's many borders.
"The government pays huge subsidies to the energy sector, which has led to the sinister phenomenon of smuggling of oil products," Qasemi said.
With the diesel price set at 4,500 Iranian rials a litre, (about 15 U.S. cents at the open market rate), diesel costs less than bottled water in Iran, which has led to wasteful consumption and a surge in smuggling, he said.
"Low prices of fuel play an important role in rising smuggling, and that is why oil products distributor companies should enhance cooperation with security forces to curb oil products smuggling," he said at the launch of new cards that monitor how much cheap gasoline Iranians can put in their cars before having to pay higher prices.
Iran has reduced its gasoline use and increased its refining capacity in response to Western governments, which have blocked supplies to the country over the past few years to pressure Tehran over its disputed nuclear programme.
With refinery capacity still falling short of domestic demand, Qasemi said gasoline could soon be blended with about 35 percent methanol to make it go further.
"A new formula has been tested in laboratory and is expected to get necessary licenses for distribution in the near future," Shana quoted him as saying.
Iran's oil minister also said that airlines operating in Iran will now have to pay cash for jet fuel for domestic flights at a rate of 7,000 rials per litre.
He called on Iranian airlines to settle their jet fuel bills in cash in late November. (Reporting by Daniel Fineren and Yeganeh Torbati; editing by Jane Baird)