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Lebanon has denied Saudi allegations that its prestigious banking system is being used to smuggle and launder funds for powerful political and militant group Hizballah.

"The Lebanese banking system enjoys international legitimacy in relation to its financial and monetary transactions," Riad Salameh, the governor of Lebanon's central bank Banque Du Liban (BDL), told Lebanon's LBCI television network on Saturday.

Saudi Foreign Minister Adel al-Jubeir on Friday claimed that Hizballah finances itself by laundering money through Lebanese banks.

During a conference in Italy, Jubeir said "Iran is harbouring and facilitating the movement of terrorists, establishing Hizballah in Lebanon, using it to launder money and smuggle drugs".

He also added that "Lebanon will only survive or prosper if you disarm Hizballah. As long as you have an armed militia, you will not have peace in Lebanon".

Echoing Salameh, Lebanese Forces leader Samir Geagea said Lebanese banks "are completely complying with the central bank's instructions to coordinate with the US treasury department, and take it upon themselves to apply international standards and banking systems".

"I do not think there are any funds for Hizballah going through the Lebanese banking system," he added.

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Tensions spiked between Saudi Arabia and Lebanon after Houthi rebels in Yemen fired a ballistic missile that was intercepted outside Riyadh earlier this month.

Saudi Arabia has accused Iran and Hizbllah of arming the rebels, charges denied by both.

Riyadh is alleged to have forced its ally Lebanese Prime Minister Saad al-Hariri to resign as head of a coalition government that included Hizballah ministers.

Hariri has since signalled he would reverse his decision if Hizballah commits to a policy of non-interference in Arab countries. 

Former US President Barack Obama signed the Hizballah International Financing Prevention Act in 2015, imposing sanctions on foreign financial institutions that deal with the political party and its affiliated TV channel al-Manar.

Since then, banks in Lebanon have refused to deal with Hizballah ministers, MPs and affiliates to dodge the huge fines imposed as a result of the act.

However, many argue that US sanctions will not harm the party's financial activities, as Hizballah is said to run its own banking system and does not deal with the dollar.

The Lebanese government and central bank have been successfully lobbying US politicians to push Washington towards a softer anti-Hizballah stance to preserve economic stability.

Their main concern is that US correspondent banks may find it too risky to carry out business with the Lebanese financial sector and as a result undermine the country's economy, which heavily relies on dollar deposits.