TEHRAN (AFP) - Eight months after taking office, Iranian President Hassan Rouhani has suffered his first major political defeat, with the public overwhelmingly brushing aside appeals to forgo direct government aid.

The 455,000-rial (S$22.39) monthly handout scheme, initiated in December 2010 by Rouhani's predecessor Mahmoud Ahmadinejad, is part of broader economic reforms aimed at overhauling the country's massive subsidy system.

The reform - which phases out parts of remaining subsidies on energy, utility bills and basic food costs - is forecast in this year's budget to save the cash-starved government US$18 billion (S$22.7 billion).

Encouraged by economists as a way of regulating Iran's economy, which is stretched thin with debilitating sanctions and mismanagement, the plan's second phase is expected to begin this week.

But the Rouhani administration for weeks ran an aggressive media campaign seeking to persuade the most affluent of Iran's 77-million population, and some of the middle class, to waive the cash payments.

Enlisting celebrities, sportsmen, politicians and even religious figures, it argued that the money should instead be spent on infrastructure, manufacturing, public transport and health care.

But on Wednesday it was announced that 73 million people - 95 per cent - had asked to receive the money, amounting to a near US$1-billion monthly bill.

The low rate of dropouts was mocked in conservative circles, and even moderates and reformists expressed criticism.

Self-declared moderate Rouhani was elected last summer, beating conservative rivals after vowing to fix the economy, seek improved relations with the West and promote greater freedoms.

Much of his election campaign was waged across reformist platforms as well as social media - which thrive despite state efforts to curtail Internet access - where he retains strong support from the upper and middle classes.

But the government's attempt to convince people to refuse direct aid appeared to overlook this audience entirely, employing only state media and targeting its viewers, who generally belong to the lower-income classes who most need the cash handouts.

"The inefficient campaign backfired and had adverse impacts," the Farhikhtegan daily said in an editorial, blaming the state-run Islamic Republic Of Iran Broadcasting (IRIB), which ran the commercials.

The mammoth IRIB is dominated by hardliners and conservatives.

The pro-reform Mardomsalari daily described the campaign as a "clearly evident failure" for the government.

"Bombarding the people with appeals... was more tiring than it was convincing. It totally flopped," the paper wrote in an editorial.

Iran's per capita income in 2013 was estimated at the equivalent of US$12,800, but the minimum wage is officially fixed at US$185, leaving many low earners depending on the direct aid.

A pro-Rouhani activist, who asked for anonymity, told AFP: "Instead of concentrating where he could persuade supporters - on social media - the government reached out to the wrong audience, on state television."

"What they effectively managed to do was alienate Rouhani's staunchest supporters," the activist said, recalling a session of parliament on April 15 when Economy Minister Ali Tayyebnia told lawmakers that "10 million wealthy Iranians have been identified".

Even if they sign up for handouts, Tayyebnia said at the time, they will be ineligible to receive the money.

Although his comments have since been denied by government officials, it appears the damage was already done.

The coming months are crucial for Rouhani as he implements the phased-out subsidy cuts, including an expected hike to petrol prices that will again feed inflation, at least temporarily, analysts say.

His nuclear negotiators will also engage in what could be final rounds of talks with world powers aimed at striking a lasting deal that would lift economic sanctions in exchange for curbs on Iran's atomic drive.