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Iran's plunging rial will be renamed and have several zeros removed in an effort to rescue the plunging currency following punishing US sanctions. 

The government agreed on Wednesday to revamp the rial after the currency hit record lows over the past year.

"The cabinet today agreed on a bill to eliminate four zeros from the currency and that 'toman' will be our national currency," government spokesman Ali Rabiei told reporters in Tehran.

The currency was trading at about 37,000 to the dollar three years ago, but it slumped to around 180,000 last year. The official rate is around 42,000 rials but is currently going for 120,000 to the US dollar on the street.

Punishing sanctions on Tehran began after President Donald Trump pulled the US out of a nuclear deal with Iran in 2015.

The Iranian government took drastic measures by arresting unlicenced money traders and speculators - even executing some.

To simplify transactions, Iranians often refer to their currency as the toman and remove zeros - a unique system that is a source of confusion for foreign visitors.

The Iranian government has now acknowledged this with its latest move, which still needs to be approved by parliament.

"This will make the national currency more effective," said the spokesman Rabiei.

"It will be more in line with common practice in society... the rial is not used that much. Coins will once again come into circulation," he added.

Despite the move, the rial has soured in recent weeks, but the IMF still predicts the country's economy will shrink by 6 percent this year, largely due to sanctions.