London-based Charlemagne Capital, an emerging market asset management group with about $2.5 billion under management, said on Tuesday it would set up and promote the funds jointly with Turquoise Partners.

The interest of foreign investors in Iran has been ignited by last week's preliminary agreement between Tehran and world powers on curbing its nuclear programme. If a final deal is reached by a June 30 deadline, sanctions that have stifled trade and investment for years will be lifted.

Charlemagne aims to launch its first fund even before that deadline, in the next few weeks. It expects the fund initially to raise over $70 million from global investors, increasing beyond $200 million in the short term, said Dominic Bokor-Ingram, portfolio adviser at the firm.

He said Charlemagne would comply with all legal requirements and sanctions-related restrictions, but the firm did not think it necessary to delay the fund launch and some investments until sanctions were actually removed.

"There is a huge amount of interest among investors. This crystallises what we have been working on for some time," Bokor-Ingram said by telephone.

One big obstacle to foreign investment is sanctions that make cross-border money transfers very hard and largely freeze Iran out of the global financial system. Bokor-Ingram declined to discuss how the new fund would deal with such problems.

During the past several years, new foreign portfolio investment in Iran has been close to zero. Turquoise says it manages about $70 million of foreign money, more than 90 percent of the foreign capital currently in the Tehran Stock Exchange, plus $130 million of local funds.

In addition to the sanctions, foreign investors in Iran will face an unstable economic environment, political uncertainty, and low liquidity which can make it hard to get into and out of stocks.

But the potential of an economy with more than 75 million people, and a diverse stock market with a capitalisation of $112 billion, may make those risks worthwhile.

The stock exchange's main index climbed 7.8 percent to a three-month high in the three days after the preliminary nuclear deal, but dropped back 1.0 percent on Tuesday.

(Reporting by Andrew Torchia; Editing by Jane Merriman and Mark Potter)

By Andrew Torchia