Iran will on Saturday start naval exercises in a region crucial for global oil supplies, state TV said, raising concern about a possible closure of the world's No. 1 shipping route for crude in the case of military conflict between Tehran and the West.

Iran aims to flaunt its military might during the 10-day drill, dubbed Velayat-e 90, at a time of heightened Iranian-Western tension over Tehran's nuclear programme that potentially could boil over into wider hostilities in the Middle East.

The Velayat-e 90 naval manoeuvres will start on Saturday and will be held in a 2,000-square km span of sea, Iranian navy commander Habibollah Sayyari told state television. Velayat is Persian for supremacy.

The drill will display Iran's defensive and deterrent power as well as relaying a message of peace and friendship in the Strait of Hormuz, the Sea of Oman and the free waters of the Indian Ocean, said Sayyari.

Echoing the stance of others in Iran's factionalised leadership, Sayyari said Iranian armed forces had the ability to shut the strategic strait through which 40 percent of the global oil supply flows, if ever the need arose.

Iran's military and Revolutionary Guards can close the Strait of Hormuz. But such a decision should be made by top establishment leaders, he said.

Some analysts and diplomats believe the Islamic Republic could try to block the strait in the event of any war with the West over suspicions it is seeking atom bombs. Iran's arch-foes Israel and the United States have not ruled out military action if diplomacy and sanctions fail to rein in Iran's nuclear work.

Iran says it wants nuclear energy only for peaceful ends.

Crude prices briefly spiked on December 13 on media reports that Iran might close the Strait of Hormuz, only to drop more than 4 percent the next day on revived euro zone debt crisis worries.

The Iranian Foreign Ministry last week denied rumours about Tehran planning to seal off the strait but warned that the waterway could be threatened if the currently surge in nuclear tension ever escalated into war.

Iran has said in the past said that it would respond to any attack by targeting U.S. interests in the region and Israel, as well as closing the strait, the only access channel for eight U.S.-aligned, Gulf Arab states to foreign markets.

OIL-RELIANT ECONOMY

Military experts say Iran's armed forces could not match U.S. military technology but could still cause havoc in shipping lanes, particularly using small craft for hit-and-run attacks.

Iran often announces advances in its military capabilities and tests weaponry in an apparent attempt to show its readiness for any strikes by Israel or the United States.

Some analysts doubt Iran would close the Strait of Hormuz if attacked. Iran's economy is reliant on petrodollars ... Closure of the waterway will harm Iran more than others, said an analyst who asked not to be named.

Oil earnings still comprise up to 60 percent of Iranian state income and the sanctions have put off an increasing number of international companies from doing business in Iran. Tehran publicly denies its economy suffers from sanctions.

The United States, Britain and Canada announced new measures against Iran's energy and financial sectors last month and the European Union is considering a ban - already in place in the United States - on imports of Iranian oil.

More sanctions on Iran's oil industry means a crippled economy for the country, said the analyst.

To ease international pressure, Iran has invited a team of senior U.N. nuclear officials to visit the Islamic state in January to discuss global concerns about the country's nuclear aspirations. Such visits in the past by senior IAEA officials have failed to resolve the long-running nuclear row.

Tehran has been hit by U.N., U.S. and European sanctions since 2006 for refusing to halt its sensitive nuclear work.

(Writing by Parisa Hafezi and Hashem Kalantari; Editing by Mark Heinrich)