By BBC diplomatic correspondent, Barnaby Mason

Western and Arab governments are watching the outcome of the Iranian elections with keen interest.

Further progress by the reformist movement towards breaking the power of the conservative clerical establishment would have repercussions far beyond Iran itself.

This could be Iran's most free election to date. The lively campaigning and open debate about fundamentals outdoes anything seen in the Arab countries of the Middle East.

This matters not only because of the size of Iran and its large population but also because of its oil resources and strategic position.

The Islamic Revolution led by Ayatollah Khomeini in 1979 shook the earth for a time, providing a model for militant, political Islam.

Impact on Middle East

It is at least possible that the opening of the political system in Iran will encourage democratic trends in the autocratic Arab world, though reformers have often been disappointed in the past.

In any event, a strengthening of President Khatami's position and a lessening of nationalist forces would probably lead to a further improvement in Iran's relations with the Gulf countries.

The biggest question perhaps is how it would affect the Middle East peace process and relations with the West - the two things are linked.

Islamic Iran has consistently opposed the peace process and backed hardline anti-Israel forces in the Arab world, in particular the Hezbollah movement in southern Lebanon.

Reconcilaition with the West

No-one could expect any Iranian Government to become pro-Israeli.

In fact, things are just as likely to work the other way round. Until there is a comprehensive peace settlement, the Arab-Israeli conflict will continue to feed militant Islamic sentiment.

But a more moderate line in Tehran would make things easier for the negotiators.

This is a key question for the United States, which still classes Iran as a backer of terrorism.

West European countries have moved a long way towards settling their quarrels with Iran.

The most significant international development now would be the start of a slow reconciliation between Tehran and Washington.

A strong showing by the reformists in the Iranian elections would make it much more likely to happen.