Iran's former president, Mohammad Khatami, is likely to announce he will run in the June election within days and expects to win voters eager to end the Islamic Republic's international isolation, a close ally said on Sunday.

Khatami, who served from 1997 to 2005, oversaw a thawing in Iran's ties with the West. Those relations have since sharply deteriorated under President Mahmoud Ahmadinejad, who an aide said last week was seeking a second four-year term.

Ahmadinejad's critics say his fiery speeches against the West have exacerbated a dispute over Iran's nuclear programme. They also accuse him of poor economic policies blamed for fuelling inflation and squandering windfall oil earnings.

"I am predicting that Khatami will announce his candidacy in the coming days," Mohammad Ali Abtahi, a former vice president under Khatami and a close ally, told Reuters.

United States President Barack Obama has offered a new U.S. approach to Iran, which has not had relations with Washington for three decades, saying he would extend a hand of peace if the Islamic Republic would "unclench its fist".

Diplomats have said it is a rare opportunity to end a rift that began with the 1979 Islamic revolution.

Khatami swept to power in a landslide vote in 1997, beating a rival seen at the time as the establishment's candidate. He secured votes with promises of political and social change.

But conservatives, who still controlled many levers of power while Khatami was in office, blocked many of his reforms, disappointing supporters such as student activists who said he should have done more stand up to the establishment.

Asked if past disappointments might hurt Khatami's chances, Abtahi said: "The international isolation of Iran under Ahmadinejad and Iran's economic situation ... may help Khatami to attract the votes of those who backed Ahmadinejad in the previous election."

Analysts have said the fate of the race could depend on whether Ahmadinejad retains the support of Supreme Leader Ayatollah Ali Khamenei, who has the last say in all matters of state and whose words could influence millions of loyalists.

Khamenei, who will also decide on any move to renew U.S. ties, has in recent months publicly praised Ahmadinejad.

Khatami himself has told Iranian media that he is considering running and that either he or Mirhossein Mousavi, a former prime minister in the pro-reform camp, will stand.

"Khatami is worried about whether his candidacy will be in the interests of the Iranian nation but he has almost reached this conclusion that his candidacy will be favourable for the people," Abtahi said.

Asked about Obama's overture, Abtahi said: "Khatami's policy has always been one of detente."

Obama's administration has promised tough diplomacy saying it will tighten sanctions if Iran does not heed work the West believes is aimed at building nuclear bombs.

Tehran denies this.