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* Major UAE exchange houses stop handling rials
* Overseas Iranian businesses say SWIFT move devastating
* U.S. lawmakers pushing SWIFT to block all Iranian banks (Adds Menendez statement, paragraph 6)
BRUSSELS, March 15 (Reuters) - The world's biggest electronic payment system on Saturday will cut off Iranian banks blacklisted by the European Union in an attempt to further strangle Tehran's ability to finance a nuclear program.
Belgium-based SWIFT, which facilitates the bulk of global cross-border payments, said it would disconnect designated Iranian financial firms from its messaging system on Saturday at 1600 GMT after European regulators ordered the company to do so.
"The EU decision forces SWIFT to take action," SWIFT Chief Executive Lazaro Campos said in a statement on Thursday. "Disconnecting banks is an extraordinary and unprecedented step for SWIFT. It is a direct result of international and multilateral action to intensify financial sanctions against Iran."
SWIFT, or Society for Worldwide Interbank Financial Telecommunication, has been described as the glue of the global banking system, handling daily payments estimated at more than $6 trillion.
Expelling the designated Iranian banks from SWIFT will shut down a major avenue through which Tehran does business with the rest of the world. The West hopes that will pressure Iran into curbing its nuclear program.
"The joint action of the U.S. and EU sends a strong message to Iran that we are serious about imposing punishing sanctions," said U.S. Senator Robert Menendez, a Democrat who pushed to make the expulsion of banks from SWIFT part of pending U.S. sanctions legislation.
SWIFT's move will follow a decision by the European Union Council, which represents EU member states, to tighten asset freezes on a number of people and entities associated with Iran's nuclear activities, which Western powers think aim to produce a weapon. Iran maintains its nuclear program is for peaceful purposes.
"The Council agreed that no specialized financial messaging shall be provided to those persons and entities subject to an asset freeze," the Council said.
The Obama administration applauded the EU decision and said it reflected consensus in the international community that "substantially increased pressure" was needed to convince the Iranian government to address their concerns about its nuclear program.
But U.S. lawmakers pushing for tougher sanctions on Iran said SWIFT needed to eradicate all Iranian financial institutions from its network, not just those blacklisted by the West.
"The impact of financial sanctions will not come close to full potential if Iran can simply go across the street to a non-designated bank to conduct the transactions with those still willing to do business with it," said Democratic Representative Brad Sherman, who is working with Republican Senator Mark Kirk on legislation that would extend sanctions to all Iranian banks.
Overseas Iranian businesses said the move might strangle their operations. One said he had been expecting SWIFT to act in a few months, and was surprised at the news on Thursday.
"It will make life even more difficult for us than before, because this is like our lifeline to the outside being cut," Naser Shaker, who owns an oil and gas trading company in Dubai, told Reuters by phone. "All the transactions will be stopped. Through the banks, there are no more options."
Another forecast the collapse of businesses dealing with Iran.
"If Iranian banks cannot exchange payments with banks around the world, then this will cause the collapse of many banking relations and many businesses," said Morteza Masoumzadeh, a member of the executive committee of the Iranian Business Council in Dubai and managing director of the Jumbo Line Shipping Agency.
"This is devastating news for our businesses, but what can I do? Do we have any options?" he said.
The announcements coincided with news that major money exchange houses in the United Arab Emirates - an important trading hub for Iran - have stopped handling Iranian rials over the past few weeks.
Nineteen banks and 25 affiliated institutions from Iran made a total of 2 million cross-border payments using SWIFT in 2010. They included banks the United States accuses of financing Iran's nuclear program or terrorism - Mellat, Post, Saderat and Sepah.
SWIFT, founded in 1973, said its decision reflected the extraordinary circumstances of international support for the intensification of sanctions against Iran. (Reporting by Philip Blenkinsop, Sebastian Moffett, Martina Fuchs, Marcus George and Rachelle Younglai; Editing by Rex Merrifield and Peter Cooney)