By Lada Evgrashina and Margarita Antidze
BAKU (Reuters) - Azerbaijan said on Friday it was investigating a U.S. vote-monitoring group for fraud ahead of presidential elections in October that are expected to extend President Ilham Aliyev's decade in power in the former Soviet republic.
Mainly Muslim Azerbaijan has been governed by Aliyev since he succeeded his father in 2003. It has been courted by the West because of its role as an alternative to Russia in supplying oil and gas to Europe.
But international rights groups have accused the government of muzzling dissent and jailing opponents - charges it denies.
The National Democratic Institute (NDI) has closed its Azeri office several times under pressure from officials, and government critics said Friday's move against it was aimed at silencing it as an independent voice ahead of the election.
The Azeri prosecutor's office said in a statement that the NDI was "distributing grants without a special registration" and that $1 million had been withdrawn from the bank account of the NDI head in Baku, Alex Grigorievs.
Grigorievs, who is currently in the United States, denied the charges, saying the NDI was "fully transparent" and working in compliance with the law when the allegations were published in a local online publication earlier this month.
"Suggestions that NDI is involved in any other activities are completely false," he wrote on his Facebook page.
The U.S. Embassy in Baku did not comment on the allegations but stressed the NDI was working to help "support Azerbaijan's civil society engagement and democratic development."
The Council of Europe's commissioner for human rights, Nils Muiznieks, said earlier this month that Azerbaijan must uphold European human rights standards and move from promises to real promotion of basic freedoms.
Police fired water cannon and rubber bullets on March 10 to disperse a crowd demonstrating against violence in the military in the capital, Baku, and detained dozens of protesters.
Last week, a court sentenced Avaz Zeynally, editor of the Khural daily, to nine years in prison for extortion, a charge he says is a baseless government reprisal for a story criticizing senior officials.
"Azeri officials are trying to secure loyalty from international organizations by putting pressure on them, but it's a bad scenario," Anar Mamedly, the head of a Baku-based election monitoring body which has been consistently critical of the government, told Reuters.
NDI has maintained an office in Azerbaijan on and off since 1996. Its current operations date back to September 2011.
In another move that puts pressure on vote monitors, Azerbaijan has proposed downgrading the mandate of the Organization for Security and Cooperation in Europe (OSCE), which has criticized the democratic credential of ballots in the country since it opened its offices in 2000.
The government suggested limiting the mission of the OSCE to the level of "project coordinator", according to a letter signed by the Azeri Foreign Minister earlier this month. The OSCE declined to comment on the proposal.
(Writing by Margarita Antidze; Editing by Alissa de Carbonnel and Patrick Graham)