The Security Council had set a Friday deadline for Iran to stop enriching uranium. The UN's nuclear watchdog, the International Atomic Energy Agency, reported Friday that Iran had ignored the demand.

While the U.S., Britain and France have taken a tough line against Iran, two other permanent council members - China and Russia - are opposed to sanctions.

Rice said the UN's credibility is on the line with Iran. "We can either mean what we say, when we say that Iran must comply, or we can continue to allow Iran to defy," she told the ABC television news program This Week on Sunday.

Uranium enrichment is at the centre of the dispute because it can be used to generate electricity, which Iran says it wants to do, or make nuclear weapons, as the West fears.

Sanctions too costly for West, Iranian says

An Iranian official said the council will not impose sanctions because that would drive oil prices even higher, hurting Western countries.

Western political leaders are already facing public discontent over high gas prices, and penalizing Iran - a major exporter - would make the problem worse.

"Any action like that will increase oil prices very high. And I believe that the UN or its bodies will not put any sanctions on oil or the oil industry," Iranian deputy oil minister M.H. Nejad Hosseinian said.

"There is an agreement between Turkey and Iran to attack our positions," the commander of the group, Rustom Judi, told AFP in Anzi, a small village in rugged mountains, located near the Iranian border some 135 kilometers (85 miles) northeast of Sulaimaniyah.

"Iranian forces have no reason to do this because the fighting has been between our men and soldiers inside Turkey, far from the Iranian border," he added.

Turkey says some 5,000 armed PKK militants have found refuge in northern Iraq since 1999, when the group declared a unilateral ceasefire after the capture of its leader, Abdullah Ocalan. The truce was called off in June 2004.

"I warn Iran that their aggression against our party's positions in Iraq will have consequences," Judi said.

A female Kurdish fighter from Syria, Mezkin Jurdit, added: "Iran has attacked our forces for the past year, arresting many of us.

"Recently, the Iranians started reinforcing their military positions on the border," she said. "If they continue their attacks, we will start a merciless guerrilla war within Iran.

"Currently our strategy is defensive, but that can change if the Iranian attacks continue," she said.

In a village near Anzi housing some 50 families, Iraqi Kurdish locals live in fear of being caught in the crossfire between the PKK and Iran.

The rebels have until now kept a low profile, despite establishing checkpoints from which they monitor signs of any possible Iranian attack.

"We live in fear of the presence of nearby Iranian troops. It reminds me of our time under Saddam Hussein," said Haji Mustafa Yunes, referring to Iraq's ousted leader who waged a decade-long war against Iran.

The 56-year-old local returned to the village following Saddam's 1991 loss of control over the region, since when northern Iraq has been under the control of the Iraqi Kurds.

His sentiments were echoed by 20-year-old Amanj Mohammed.

"We're startled by planes because we fear we could be the target of a bombing," he said.

Iran has accused Kurdish rebels of infiltrating its territory.

Teheran and Ankara have agreed to help each other fight both the Kurdish rebels who oppose Turkish rule and the People's Mujaheedeen, an Iraq-based group opposing Iran.

Turkey has long urged the United States and Iraq to root out the PKK from its bases in the mountains of northern Iraq, but it has been told that violence in other parts of the conflict-torn country was their priority.

US Secretary of State Condoleezza Rice called on Ankara during a visit last Tuesday to refrain from unilateral action against the Iraq-based Kurdish rebels, calling instead for renewed trilateral cooperation to fight the threat.

Turkey has massed troops along the border to intensify operations against PKK rebels who are sneaking into Turkey in growing numbers with the arrival of spring when snow melts and makes passage through the mountains easier.

The Kurdish conflict has claimed more than 37,000 lives since the PKK launched its separatist campaign in 1984.

"The questions is how we can prevent it. If someone is proposing use of force, it is counterproductive. It may lead to catastrophic consequences. Therefore, it is necessary to find political solutions. Is it difficult to find them? No doubt. But one must aim at it," Primakov said.

He added that the issue connected with Iran's uranium enrichment at the Russian territory was still open and that negotiations should be continued.

"The main thing is to evade use of force against Iran because (otherwise) it would throw not only the region back, it would throw the whole East back, I think. One should not trifle wth this," Primakov said.

Yevgeny Primakov was Russia's Prime Minister since September 1998 until May 1999. He was regarded as a compromise figure between Yeltsin's government and Communist opposition.

During the Soviet era, Primakov was director of the Institute of Oriental Studies of the Academy of Sciences (1977-1985) and director in the Institute of World Economy and International Relations (until 1989). In 1989, he was appointed chairman of one of two houses of the Soviet parliament. He served as Gorbachev's special envoy to Iraq in the run-up to the Gulf War, in which capacity he held talks with President Saddam Hussein. In 1991, after the coup against Gorbachev failed, he was appointed First Deputy Chairman of the KGB.

In modern Russia, Primakov worked as director of the Foreign Intelligence Service (1991-1996), and as foreign minister (1996-1998). He strongly but pragmatically supported Russia's interests and was an opponent of NATO's expansion into the former Eastern bloc. He promoted Russia, China and India as a "strategic triangle" to counterbalance the United States.

"After more than three years of agency efforts to seek clarity about all the aspects of Iran's nuclear program, the existing gaps in knowledge continue to be a matter of concern," the report continued. "Any progress in that regard requires full transparency and active cooperation by Iran... if the agency is to be able to understand fully the 20 years of undeclared nuclear activity by Iran."

However, the monitoring agency was able to find evidence to back up Tehran's claim of enriching uranium in a cascade of 164 centrifuges.

"On April 13, 2006, Iran declared to the agency that an enrichment level of 3.6 percent had been achieved," the report said, adding five days later... The IAEA "took samples at (the) Pilot Fuel Enrichment Plant, the results of which tend to confirm as of that date the enrichment level declared by Iran."

Ambassador Emyr Jones Parry of Britain said he and the ambassadors of France and Germany were already working on a draft resolution the trio is sponsoring.

"We're consulting the United States very closely," he told reporters outside the council chamber. "I expect that early next week there will be discussions more broadly and by the middle of the week, I am quite confident, introduce into council, at 15 (members), a resolution to respond to this report."

There was no mention of sanctions.

U.S. Ambassador John Bolton of the United States said, "Our immediate task here in the council is clear, and that is to produce a resolution under (U.N.) Chapter VII making the IAEA resolutions mandatory."

A council resolution under Chapter VII carries the weight of international law, which is binding on all member states of the United Nations.

"The United States thinks the council is ready to proceed," Bolton said. "We're ready to move expeditiously and what comes after that is largely in Iran's hands."

Meaning, if Iran cooperates it won't have to face sanctions, or worse, down the road.

Ambassador Wang Guangya of China, this month's president of the council said diplomacy was still at work.

"The feeling of almost all the members, including all the major powers (permanent members Britain, China, France, Russia and the United States) is that this is an important issue and all we want is to work for a diplomatic solution because this region is already complicated," he said. "There are a lot of problems in the region and we should not do anything that would cause the situation (to become) more complicated."

However, Bolton cited Washington's reasons for a tough stance.

"Iran has done nothing to comply with existing IAEA Board (of Governors) resolutions or the request contained in the Security Council Presidential Statement that it suspend all enrichment-related activities, come into full compliance with the additional protocol and take a number of additional steps to show that in fact Iran's nuclear program is for purely civil, peaceful purposes, as they contend," the envoy said.

"I think, if anything, the IAEA report shows that Iran has accelerated its efforts to acquire nuclear weapons, although, of course, the report doesn't make any conclusions in that regard," he went on. "We are concerned about the continued work that Iran is doing to acquire nuclear weapons capability. We do think there's a sense of urgency here."

Since a Chapter VII resolution requires there be a threat to peace and security, Bolton was asked how Washington will present such a case.

"Evidence of Iran's efforts to acquire nuclear weapons, its extensive program to achieve a ballistic missile capability of longer and longer range and greater accuracy, constitutes a classic threat to international peace and security, especially when combined with Iran's long status as the world's leading state sponsor of terrorism," he said, echoing U.S. President George W. Bush's charge Tehran was part of an "axis of evil."