The engineering arm of Iran's Revolutionary Guard Corps said Friday it was pulling out of projects in a giant Iranian natural-gas field in the Persian Gulf, blaming mounting sanctions from the West, the Wall Street Journal reported.

The decision is a blow to a push by President Mahmoud Ahmadinejad to tighten control of the country's oil and gas industry and suggests a round of fresh international sanctions specifically targeting the IRGC is causing new difficulty for the group, a paramilitary organization with a range of business subsidiaries.

Mr. Ahmadinejad's economic policies are also facing a separate, growing challenge: A strike by merchants at Tehran's main bazaar, over a proposed tax increase, dragged into its second week. The merchants are seen as a pillar of the Iranian economy, controlling a large slice of the import, export and retail sectors. They are also a symbolic force, credited with helping to bring down the shah when they went on strike during the Iranian revolution in 1979.

Since then, the merchants, organized through guilds, have largely aligned themselves with the conservative Islamic regime and have stayed out of politics.

All week, the merchants, who trade products such as carpets, jewelry and white goods, kept storefronts shut, and the bazaar's usually bustling streets and alleyways were empty of traffic. On several occasions, riot police and plainclothes militia dispersed onlookers and pressured shopkeepers to open their stores, merchants said.

>Iran's economy, which is dominated by the energy sector, has been battered by the effects of sanctions and mismanagement. Tehran needs foreign capital and know-how to develop the giant offshore natural-gas project, known as South Pars, but they have seen major energy companies shy away from preliminary commitments to get involved.

Foreign hesitation has heightened over the past year, as the Obama administration threatened to enact fresh economic sanctions on Iran to curb its nuclear program if Washington didn't make progress diplomatically.

As big international companies stayed on the sidelines, domestic companies, including some affiliated with the IRGC, said they could fill the void.

The IRGC now appears to be backtracking somewhat, after the United Nations, the U.S. and the European Union all have moved to enact fresh sanctions targeting companies affiliated with it.

The move by the Guards' engineering arm, Khatam al-Anbiya, to back out of South Pars may help protect the wider project—or individual foreign partners—from falling foul of the new sanctions.

In 2006, Khatam al-Anbiya got contracts for a combined $2.09 billion to develop two phases of the South Pars field. The deals were part of a string of projects—from petrochemical plants to oil drilling—awarded to the group after the election of Mr. Ahmadinejad in 2005.

The Iranian president also secured the appointment of former IRGC official Masud Mirkazemi as oil minister last year, and an Ahmadinejad loyalist recently took the helm of the National Iranian Oil Co.

Last month, Khatam al-Anbiya was specifically named by new U.N. sanctions imposed against Iran over its nuclear program. The IRGC and Khatam al-Anbiya had already been named in previous U.S. sanctions.

The EU says Khatam al-Anbiya's subsidiaries were heavily involved in the construction of an Iranian uranium enrichment site in Qom. The West suspects Iran's nuclear program has military aims, while Iran says it is peaceful.

There have been other recent indications of an IRGC retreat from the oil patch. Last month, Khatam al-Anbiya failed to win the bulk of the $21 billion in contracts awarded to Iranian companies to develop South Pars. That surprised observers because Iranian officials had predicted that the group would win the bids. Marine services company Sadra, which is partly owned by Khatam al-Anbiya, did get some contracts, however. A spokesman for the company operating South Pars didn't respond Friday to a request to comment on the pullout by Khatam al-Anbiya.