New York: According to a report in the New York Times, Iran has offered to lend Iraq $1 billion and Iraqui authorities were reviewing an application by Iran to open a branch of an Iranian bank in Baghdad

This is because the economies of the two countries are becoming closely integrated. Iranian goods are flooding Iraq markets and Iraqi cities look to Iran for basic services even as the the Bush administration works to stop Iran from meddling in Iraq.

The New York Times says "Iranian air-conditioners fill Iraqi appliance stores, Iranian tomatoes ripen on the windowsills of kitchens and legions of white Iranian-made Peugeots sit in Iraqi driveways".

According to the report, the Iraqi government relies on Iranian companies to bring gasoline from Turkmenistan to alleviate a severe shortage. The report notes that commerce between the two neighbours has exploded since the American-led invasion of 2003.

However, the bulk of the money is heading in one direction, though as Iraq is becoming dependent on imports because its industries been ravaged by the economic sanctions of the 1990s and the current sectarian violence.

"Reconstruction and security have lagged so far behind the expectations of ordinary Iraqis that cheap goods from Iran and neighbouring countries often provide the only comforts in their lives," the paper reports.

New York Times quoted Iraqi leaders saying that political and economic ties with Iran, which is governed by Shiite Persians, will inevitably strengthen due to the hostility of Sunni Arab states to a Shiite-run Iraq and Iran a non-Arab Persian nation coupled with the ambivalence of the White House toward the Shiite parties in both countries.

The two countries fought an eight-year war from 1980 to 1988, which battered their economies.