ABU DHABI (Reuters) - A visit by the Iranian Revolutionary Guards commander to three tiny islands near the Strait of Hormuz oil shipping lane revives a bitter territorial dispute between Gulf antagonists - and trade partners - Iran and the United Arab Emirates.
Abu Dhabi has yet to comment on Thursday's trip by Mohammad Ali Jafari, but like other Gulf Arab capitals it reacted angrily when Iran's President Mahmoud Ahmadinejad toured one of the islands in April, and recalled its envoy from Tehran in protest.
Tension between Shi'ite and Sunni Muslims in a Middle East shaken by 18 months of political revolt has envenomed the 41-year-old row, complicating an ambivalent relationship in which national pride has long vied uneasily with economic pragmatism.
The UAE weathered last year's Arab uprisings unscathed, but has cracked down on Islamists in recent months, wary lest the successes of their peers after upheavals in Tunisia, Libya and Egypt embolden them to challenge the government.
The danger of a confrontation between Shi'ite Iran and the United States, the military protector of the Sunni-ruled Gulf states, over Tehran's disputed nuclear program has also fuelled a voracious appetite for weapons in the region.
Iran has threatened to target U.S. interests in the Gulf and to block the Strait of Hormuz if attacked. The UAE is a top U.S. arms buyer, agreeing deals worth over $10 billion between 2007 and 2010, according to the Congressional Research Service (CRS).
"We shake the friendly and brotherly hands in Islamic countries, especially those south of the Persian Gulf, and ask them to help get rid of the arrogant powers who are now in the region," Iranian state television quoted Jafari as saying during his visit to military forces deployed on the islands.
The U.S.-backed shah of Iran put troops on Abu Musa, Greater and Lesser Tunb in 1971, just before the seven Gulf emirates won independence from Britain and formed the UAE. The emirates of Sharjah and Ras al-Khaimah had previously ruled the islands.
"PROVOCATIVE RHETORIC"
The Islamic Republic says it wants good ties with the UAE, but, like the shah, insists it owns the islands and has ignored Abu Dhabi's calls for arbitration or a diplomatic solution.
After Ahmadinejad's visit to Abu Musa in April, UAE Foreign Minister Sheikh Abdullah bin Zayed al-Nahayan said his "provocative rhetoric exposed Iran's false allegations regarding its keenness to establish good neighborly relations and friendship with the UAE and countries of the region".
Persistent protests led by a Shi'ite majority demanding reform in Sunni-ruled Bahrain have aggravated regional tension, with Saudi Arabia and the UAE accusing Iran of fomenting trouble in the island state and elsewhere - charges Tehran denies.
But fear of Iranian meddling has spread among Emiratis, threatening to poison once-thriving and often unofficial trade relations between two of the world's leading oil exporters.
In free-wheeling, cosmopolitan Dubai, the creek remains full of dhows ferrying goods to Iran across the Gulf, but many people in nearby Abu Dhabi take a darker view of Iranian intentions.
"What they are doing in Bahrain they might do in other countries around here," murmured a 40-year-old Emirati businessman in Abu Dhabi, who asked not to be named.
Such fears seem far-fetched given the demographic contrast between Bahrain and the UAE, with its small Shi'ite minority, estimated at 10 to 16 percent of an overall population of 8.3 million, of which 90 percent are expatriates.
The roots of this anxiety stretch ever further back than the rift between Sunnis and Shi'ites some 13 centuries ago. Some Emiratis believe Iran shares the same "imperialist" designs as the Sassanid Empire which dominated the region before Islam.
"They still see themselves as the Persian empire and they want to rule over the region," said an Emirati customs employee, who also asked not to be named. "I am not scared of Shi'ites, I am scared of strife. Emirati society is scared of strife."
COMPLEX RELATIONSHIP
According to Michael Stephens, a researcher at the Royal United Services Institute Qatar, Iran has stationed a few hundred soldiers on the disputed islands along with some long-range - and inaccurate - HY-2 Silkworm anti-ship missiles.
"The real arena between the two sides is Bahrain, but these islands are a source of quite serious tension," he said.
"Many (Gulf Arabs) believe that Iran wants to take over the Persian Gulf and remake it in its own image."
But personal and commercial links between the UAE and Iran also stretch back over centuries and are not easily broken.
The UAE's Iranian community of half a million, according to Dubai's Iranian Business Council, includes many property and business owners clustered in the old trading hub of Dubai.
Apart from these expats, there are also Emiratis of Iranian origin, mostly Sunni Arabs whose families were uprooted or migrated from their homes across the Gulf a few generations ago.
Dubai's direct re-exports to Iran grew 29 percent to 31 billion dirhams ($8.4 billion) last year, the fastest rise in five years, despite a marked slowdown in the last quarter.
Dubai has often been seen as a weak link in implementation of international sanctions against Iran, but diplomats say the UAE has tightened controls in the past year. The IMF said in May this would have only a "moderate" impact on the UAE's growth.
In December, Washington pressured Dubai-based Noor Islamic Bank into stopping the channeling of billions of dollars from Iranian oil sales through its accounts.
Such pressure and Abu Dhabi's greater power since it bailed Dubai out of a corporate debt crisis in 2009, means the UAE now takes a more unified line on Iran, diplomats and analysts say.
"Abu Dhabi faces a conundrum. They have to be seen as whiter than white for the Americans on Iran because of how engaged U.S. public opinion is on the issue," said Kristian Coates Ulrichsen, research fellow at the London School of Economics.
"But if you have Dubai that is essentially a loophole for Iran to evade the tightening of sanctions and, who knows what other unregulated trade might be going through, then that is embarrassing at best but also potentially a security breach."
Yet the UAE's juggling of conflicting demands and interests vis a vis Iran may have its uses, a Western diplomat said.
"It may be double-handed but it's not two-faced. It's also a useful dance because it allows them to keep their options open."
(Editing by Alistair Lyon)
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