LONDON -- A Malaysian-backed plan for Islamic states to use gold rather than the dollar to settle trade accounts from next year faces major difficulties in gaining credibility, Europe-based gold analysts said on Tuesday.

An economic advisor to Malaysian Prime Minister Mahathir Mohamad on Monday showcased a proposed trade system based on an electronic unit of value called a gold dinar to foster trade among the world's 1.3 billion Muslims.

The proposed trade settlement system, to coincide with Malaysia's hosting of next year's Organization of Islamic Conference summit, aims to reduce the paramountcy of the dollar and reinstate gold as an international currency, Reuters reported.

But the plan faced obstacles, notably the problem of how to extend the system beyond a few government transactions and limit exporters' exposure to volatile gold prices.

"It will be very difficult to develop a system that will have enough credibility and liquidity to facilitate trade of any great size," said Kamal Naqvi, metals analyst at London-based MacQuarie Research.

"The scheme appears to be politically rather than economically motivated," Naqvi said.

Mahathir blamed Western currency speculators for the Asian financial crisis of 1997/98, which spurred him to impose capital controls and fix the ringgit's exchange rate against the dollar.

Some Islamic countries, at odds with the United States particularly over its support for Israel, have also expressed their dislike of U.S. influence in world affairs.

Under the plan, Muslim governments in the plan would hold gold in a clearing house or a Central Bank that would then be used to settle trading accounts between themselves rather than resorting to foreign exchange markets and Western financial institutions.

The project has been on the drawing board for the best part of the decade and has progressed alongside schemes for Internet-based electronic gold dinar currencies such as WWW.E-DINAR.COM where the dinar is worth 4.25 grams of gold.

????I?? Increased Price Risk? ?????/ Although analysts said the scheme would work with backing by governments, they added that private exporters might hesitate to use the new system if it denied them the flexibility of foreign currency markets or made them vulnerable to volatility in the gold price.

"This is not a risk reducing exercise. The price volatility of gold is higher than the major currencies -- going from dollars to gold does not reduce risk," said one Europe-based metals analyst who declined to be named.

World gold prices have rallied around 20 percent at their peak this year, fuelled by a rush into the safe-haven metal by investors scared by slumping stock markets, a wilting dollar and fears of a repeat attack on the U.S. mainland.

But this has been accompanied by increased price uncertainty, a potentially further headache for major Islamic oil exporters such as Saudi Arabia and Iran who would now be faced with exposure to gold prices in addition to the value of the dollar and the world oil price.

"So if you have the price of gold going from $300 to $800 an ounce, what will you do? you can certainly start this. Will it be acceptable on a large scale? I'm less convinced," said author and academic Bernard Lietaer, who helped create the single European currency when working for the Belgian Central Bank.

Lietaer, speaking in Kuala Lumpur, is promoting a new global currency fully backed by a basket of physical commodities such as crude oil or wheat as well as gold.

Since Malaysia had healthy trade surpluses with most Islamic states, the scheme would mean that the country was one of the biggest gainers from the dinar plan.