A Turkish-Iranian gold trader testifying at trial in New York on Thursday implicated Turkey's President Recep Tayyip Erdogan in a multi-billion-dollar gold-for-oil scheme allegedly designed to subvert US sanctions on Iran.

Reza Zarrab, 34, who was arrested in Miami in 2016 before agreeing to cooperate with US prosecutors, implied that Erdogan knew how he and a Turkish banker, now on trial, circumvented US sanctions on Iran and laundered money from Iranian petroleum sales.

The case has angered Erdogan. His government has called the trial a "plot" and he has demanded the release of Zarrab and defendant, Mehmet Hakan Atilla, the deputy chief executive of Turkish lender Halkbank.

"We did the right thing. We did not violate the embargo," Erdogan told lawmakers in Turkey on Thursday, according to state broadcaster TRT Haber.

But in New York, Zarrab said he was told that in 2012, Erdogan, prime minister at the time, and then treasury minister Ali Babacan had given "instructions" for two other Turkish public banks, Vakif and Ziraat, to take part in the scheme.

Turkey's then economy minister, Zaref Caglayan, "told me that Mr. Prime Minister had given approval for Ziraat and Vakif to also do this work," he said through a Turkish-language interpreter.

Zarrab also used his second day of testimony to declare that he extended the multi-billion-dollar scheme to India and tried to do so in China.

"But then all the banks we were working with, they immediately stopped it when they realized it had something to do with Iran," Zarrab testified.

On Wednesday, he said he paid tens of millions of dollars worth of bribes to Caglayan between 2012 and 2013 to facilitate illegal gold transactions with Iran.

Due to face trial himself, he instead pleaded guilty to seven counts and became prosecutors' star witness. While others have been indicted, they remain at large and Atilla is alone in the dock.

- 'Under pressure' -

While Erdogan is not charged with any crime, analysts had expected that corruption revelations could embarrass him and his inner circle.

Turkish Deputy Prime Minister Bekir Bozdag said Zarrab was making defamatory claims because he was "under pressure."

There are fears in Turkey that a guilty verdict could lead to possible sanctions on one or more Turkish banks, spelling bad news for the country's fragile economy.

Zarrab was a key figure in a 2013 Turkish corruption scandal in which he allegedly bribed four ministers to facilitate sanctions-busting trade and other deals.

He allegedly carried suitcases stuffed with cash to Dubai, where they were exchanged for foreign currencies used for international payments to circumvent the US sanctions.

He was held for 70 days until prosecutors dropped all the charges.

Caglayan, who is also named in the US indictment, and the other three ministers resigned from government at the time.

Turkey has denounced both the New York trial and the 2013 scandal as conspiracies by US-based preacher Fethullah Gulen, the alleged mastermind of a 2016 failed coup targeting Erdogan.

Gulen denies the allegations.

Atilla is charged with violating sanctions against Iran, as well as of bribery and money laundering.

Halkbank has denied any suggestion that it violated US sanctions, saying it had "not been a party" to any "illegal" transaction.

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