One summer afternoon in 2000, when I was working in Tehran, some Iranian friends called to report an amazing development: Searching around on the Web, they had come across a smiling Ayatollah Hossein Ali Montazeri staring back at them, his round cheeks and large-framed glasses taking up a good chunk of their computer screens. The fact that Montazeri had created his own Web site, not only for Iranians but for the whole world to see, seemed inconceivable. At the time, Montazeri was under house arrest for saying the unthinkable -- that Iran's supreme leader, Ayatollah Ali Khamenei, was ruling the country like a dictator. In a place where any negative public comments about Iran's supreme clerical ruler constitute a crime, Montazeri was lucky to be alive. Yet he had made another bold move by finding freedom in cyberspace.

The Iranian government lifted Monta- zeri's house arrest late last month after five years. The next day, as he strolled in the garden in his house on Riverbank Street in Qom, Montazeri told reporters that freedom for Iranians was all he ever wanted. Whether his own liberation will eventually lead to that goal is uncertain. But it is clear that the end of his house arrest is more significant even than his virtual jailbreak that summer day.

The aging ayatollah could be central to breaking the impasse that has long kept Iranian society frozen in place. For more than a decade, the cleric, now in his eighties, has carefully reexamined his revolutionary career and concluded, in e-mails to me and on his Web site and elsewhere, that the Islamic republic he helped create has lost its course. Anyone who truly wants to understand Iran today should pay close attention to Montazeri and his ideas.

For Montazeri, the solution to Iran's conflict lies not in turning Iran into a secular state, as some Washington insiders and expatriate Iranians hope. Even President Bush, in his State of the Union address, effectively called upon the Iranian people to overthrow their religious government. But Montazeri and a generation of progressive clerics and lay activists he inspired are working on a formula that would give far more power to the people under Islamic rule. This means creating a government that, while religious, allows for freedom of speech, women's rights and a pluralistic political system -- in other words, a state that he sees as a genuine Islamic republic, one that respects both religious and personal freedom.

In this respect, Montazeri and his followers are not that different from Muslim reformers throughout history; they are searching for a way to meet the needs of modern life while still maintaining Islamic law as the primary basis for governing the state. Montazeri's release provides Iran with a second chance to complete its interrupted journey to the promised land of the modern Islamic movement -- a state that is at once democratic, religious and non-Western.

The same goal was among the central demands of the millions who took to the streets in 1978 and 1979 to bring down the U.S.-backed shah. But once Ayatollah Ruhollah Khomeini began running the state as its religious leader, freedom began steadily to slip away. Today, under his successor, Khamenei, repression has increased: Khamenei has given orders to close progressive newspapers, and imprison journalists and others who criticize the state. University students who have demonstrated against the government have been assaulted by police before being hauled off to jail. It was against this backdrop that Montazeri, once named to succeed Khomeini but soon deposed for demanding a greater role for the people in state affairs, began to amass a huge popular following.

As a correspondent in Iran for Britain's Guardian newspaper from 1998 to 2001, I often asked the hard-line clerics I interviewed why they kept Montazeri under house arrest. Once I posed this question to Mohammad Yazdi, the former chief of the judiciary who is now a member of the Guardian Council, a body of clerics that vets all legislation for Islamic orthodoxy.

As he sat in his stately office, in what was once a palace under the shah, Yazdi -- unusually -- was lost for words. He stroked his long white beard, as I waited for him to answer. I then reminded him that Mon- tazeri had been designated a grand ayatollah, the highest clerical rank in Shiite Islam. This meant that millions of believers relied on Montazeri for spiritual and practical guidance; his fatwas, or religious decrees, laid out precisely what is required for each follower to lead a good Muslim life. His status also gave him the right to collect millions of dollars in religious taxes, paid by these same followers for the upkeep of his ministry and the support of his seminary students. To cast aside such a respected theologian was considered taboo throughout the history of Shiite Islam.

Rather than venture down a dangerous road, Yazdi reminded me that he had agreed to the interview as long as I agreed not to talk about politics. He then abruptly ended our meeting.

This encounter revealed the secret the Islamic republic has tried to keep from the outside world: that great divisions have developed within the clerical caste. The real struggle in Iran is not a politically centered one between reformers and hard-liners, which is the standard framework for most American news reports. Rather, it is the struggle of Islam versus Islam. Progressive clerics like Montazeri are pitted against conservatives like Yazdi over how a clerical regime should apply religion to daily life in ways that will keep them in power -- while still satisfying the practical, modern needs of Iranians.

The most heated issue dividing the clerics concerns the degree of power the supreme leader should have -- the very issue that got Montazeri put under house arrest. Montazeri and other progressive clerics believe that Islam does not permit the absolute concentration of power in the hands of a single leader because he is a fallible human being, prone to error and sin. Only God's word, they argue, can be absolute. "I am very sad and sorry to see . . . there is no tolerance in the Islamic society for hearing anything other than what is coming out of the ruling circles, a condition in which the children of the revolution and those concerned with the fate of the country are being sent to jail, and a situation in which Islam . . . is being exploited," Montazeri wrote to me in a 10-page fax. But this reading of the faith contradicts how Khamenei, the current supreme leader, rules the country and has defined his job: He demands the final word in all matters, from religious issues to foreign affairs.

President Mohammad Khatami thought he could resolve the controversy when he was first elected in 1997. As a modernist cleric, he thought he could remain true to the current Islamic system while making enough accommodations to the young people who elected him and who constitute more than 50 percent of the population. But his limited powers under the Iranian constitution, which gives the supreme leader final say, have been a great obstacle for him. And, unlike Montazeri, who believes the constitution should be rewritten to give the people more say in running the state, Khatami chose not to take such a radical step. As a result, he has become virtually irrelevant. The university students who once cheered him now chant publicly that he should resign.

Montazeri steps into the political vacuum left by the failure of Khatami's mainstream reform movement and its conservative rivals. While still under house arrest, Montazeri wrote to me that he would likely return to politics if he were set free. "Now that I am under siege, I spend my time . . . studying, and reading newspapers and other publications. If and when the siege is removed, I will have to make a decision relevant to the new circumstances." At that time, he had to spread his ideas furtively. Now he can reconnect with the hundreds of thousands of clerical students and ordinary Iranians who consider themselves his religious and political followers. Certainly his reemergence gives new hope to all those who are trying to create that true Islamic republic in which personal liberties can find balance with the requirements of the state. Geneive Abdo, a correspondent in the Washington bureau of the Boston Globe, is co-author of "Answering Only to God: Faith and Freedom in Twenty-First Century Iran," to be published next month by Henry Holt.

Ayatollah Hossein Ali Montazeri's release from house arrest could lend authority to Iran's reform movement.