The case, which is being held in public, has stirred deep political turmoil in the country. Mr Karbaschi is a leading reformist figure in Iranian politics. His supporters say he is being prosecuted by the conservative-dominated judiciary for political reasons.

President Khatami won the vocal support of Mr Karbaschi

The mayor played an important part in the landslide election victory of the popular reformist President Mohamad Khatami in 1997. Mr Karbacshi's supporters say that the humiliated hard-liners are out for revenge.

The BBC correspondent at the proceedings says the mayor appeared confident at the hearing, which was crowded with a jostling pack of camera men and reporters.

The BBC Middle East correspondent Jim Muir reports on the start of the trial

The mayor sat and listened impassively as the prosecutor read out a long list of formal charges against him including embezzlement, fraud and mismanagement of public funds. He dismissed all the allegations as lies and engaged the judge in a lengthy and bitter dispute over court competence. After his statement, the trial was adjourned until Thursday.

Divisions

Mr Karbaschi is kissed in the street on his release

The case threatens to exacerbate divisions within the Islamic regime at a time when it is trying to close ranks in the wake of last week's bomb attacks in Tehran by hard-core opponents bent on its overthrow.

Mr Karbaschi's arrest in April split conservatives and moderates in the Iranian leadership. The country's supreme leader, Ayatollah Ali Khamenei, intervened to release him after his detention caused a political furore amongst his supporters.

Vahe Petrossian of the Middle East Economic Digest discusses the case

He had been detained on the orders of the conservative-led judiciary who said they were investigating corruption in the Tehran municipality.

Our correspondent says it was thought that the affair might be quietly brushed under the carpet following his release. However, the judiciary insisted on going ahead with the case.