FEATURE-Iraq becomes dollar source for sanctions-hit Iran, Syria

* Dollars bought in Iraq central bank auctions

* Then transferred via wire to Iran, Syria

* Economic, political ties with Iraq have grown

* But some money changers, business find risks too high

* High forex reserves shield Iraq's financial system

By Aseel Kami

BAGHDAD, Feb 1 (Reuters) - In the money changing shops dotted around Baghdad's Karrada district, Iraqi merchants dabble in many currencies, but these days some joke that banknotes from neighbouring Iran and Syria are only worth plastering on windows as decorations.

Discounted Iranian rials and Syrian pounds are pouring into the shops as Western economic sanctions against those two countries make it harder for them to conduct trade with much of the rest of the world, arrange international bank transactions and obtain hard currency.

Iraq, which shares porous borders and political ties with both countries, is emerging as an important source of dollars for them.

Sales of dollars in currency auctions held by Iraq's central rose as high as $400 million on some days in December from a previous average of $150 million, according to central bank data. Many of those dollars were bought by Iraqi traders for resale in Iran and Syria.

"The main reason for this is the sanctions imposed on Iran and Syria, and the fact that their bank transactions are having trouble. Iraqi businessmen play the role of middlemen," deputy central bank governor Mudher Kasim said in January.

Kadhim Sabri, who works at a Karrada currency exchange shop, said some of the dollars purchased in the central bank auctions went straight to Iran or Syria via a loosely monitored network of wire transfer agencies. "It is more profitable to sell them in Iran or Syria."

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