The president's rising popularity owes as much to his common touch as US enmity. Many ordinary Iranians, while complaining about wages, inflation and restricted personal freedoms, approve of the Blair-like "national conversation" that Mr Ahmadinejad has launched through fortnightly provincial tours and rallies.

"He is a good man. He tries to do his best," said Saeideh, a student in Shiraz. "My family supported [Mohammad] Khatami [the former reformist president]. But it is good the way Ahmadinejad stands up to the Americans."

Mohammad Atrianfar, founder of the main opposition newspaper, Shargh, admitted that Mr Ahmadinejad had succeeded in cultivating a popular image, but questioned his authority. "My impression is that he is just a mouthpiece, an amplifier for various interests elsewhere," Mr Atrianfar said.

Anti-government intellectuals and secularists also attribute Mr Ahmadinejad's ascendancy to the backing of clerical hardliners, as well as the Revolutionary Guards and basij militia. They said the president owed his job to the supreme leader, Ali Khamenei, who was primarily concerned with establishing Iran's leadership in the Muslim world over the rival claims of Arab states such as Egypt.

Mr Khamenei is said to be gratified by Mr Ahmadinejad's hero status in the Arab world as a scourge of the Bush administration and champion of Palestinian rights. At the same time, western diplomats said there was evidence the president was "learning on the job". He had toned down his rhetoric and qualified last autumn's inflammatory remarks on the Holocaust and Israel, they said. He now says Iran simply wants justice (a key Ahmadinejad theme) for Palestinians and does not see why Muslims should pay for past European persecution of Jews.

Yet Mr Ahmadinejad is far from being a puppet of Iran's mullahs or clerics. A strong current of anti-clericalism permeates the Islamic republic 27 years after the revolution, largely the product of perceived corruption and abuse of power. His advancement came in part because, ironically, he was able to assume Mr Khatami's mantle as the "anti-status quo candidate", a source said.

The secret of Mr Ahmadinejad's success was that he had distanced himself from both the Islamic establishment and the discredited, mostly middle-class reformers of the Khatami era, building a third constituency among the working classes, younger voters and the less well-off.

Siamak Namazi, an independent Tehran political analyst, said: "Ahmadinejad represents the second generation of revolutionaries, the foot soldiers of 1979. They are the ones who fought the war against Iraq, they are the ones who suffered when Saddam used chemical weapons (whose components were supplied by the west). They are the ones who now get lectured by the west about WMD. They feel very suspicious about the west. They also feel the older generation sold them out." Mr Ahmadinejad was "politically right but economically ultra-left", he added.

Some see Mr Ahmadinejad as a product of the pre-revolutionary period in which Marxist ideas mingled with Sufi mysticism and Islamic spiritual values. His support for a centrally directed economy, continued state subsidies and more equal rights for women can thus be reconciled with his opposition to reform of Iran's inherently conservative, Islamic-based power structure.

All the same, economic mismanagement and inefficiency may yet be his undoing. "This is a sick economy dependent on the price of oil," said Vahid Karimi of the Institute for Political and International Studies. Structural weaknesses including lack of investment, a tiny private sector, and capital flight were not being addressed, a report by 50 prominent economists concluded. A fast-growing population was increasingly demanding more than the government was delivering, a western diplomat said. "They are squandering the oil windfall."

Mr Ahmadinejad's fall, if and when it comes, is unlikely to be the result of political insurrection, outside intervention, or his demonisation as America's new bogeyman. Its likely cause will be more mundane. In Iran, as elsewhere, it's the economy, stupid.

"There really needs to be an effort now to try and calm the situation," Rice told reporters en route to Pakistan, where she is holding security talks.

Palestinian troops have blocked roads in northern Gaza in preparation for possible invasion by the Israelis.

Cpl. Gilad Shalit, 19, was abducted Sunday after Palestinian gunmen travelled through a 600 metre tunnel under the Gaza border and attacked a remote guard post. Two Israeli soldiers were killed in the attack.

In a statement released on Monday, the abductors demanded the release of about 500 Palestinian women and children detained in Israel.

Israeli Prime Minister Ehud Olmert refused.

"This is not a matter of negotiations. This is not a matter of bargaining," Olmert told Jewish business leaders in Jerusalem. "Release of prisoners is absolutely not on the agenda of the Israeli government."

Meanwhile, Palestinian news agency Ma'an reported on Tuesday it had conducted a poll in which 82 per cent of Palestinians believed Shalit should only be released in exchange for Palestinian soldiers.

US Secretary of State Condoleezza Rice has urged Israel to give diplomacy a chance to win the release of the tank gunner.

She said a concerted international effort was under way to secure his freedom and appealed for calm rather than an escalation of the situation.

'Time running out'

Mr Olmert has put the army on standby for an extensive military operation against Palestinian militants to free Cpl Shalit and Israeli tanks and armoured vehicles have been assembling on the Gaza border.

"The question of freeing [Palestinian] prisoners is in no way on the Israeli government agenda," Mr Olmert said during a speech in Jerusalem.

"There will be no negotiations, no bargaining, no agreements."

Mr Olmert said that Israel would not allow itself to become the victim of "Hamas-terrorist blackmail", warning that "a large-scale military operation is approaching".

"The time is approaching for a comprehensive, sharp and severe Israeli operation. We will not wait forever," Mr Olmert said.

Cpl Shalit is believed to have been taken captive by militants who tunnelled out of Gaza to attack the army post at Kerem Shalom.

Two Israeli troops and two militants were killed during the raid.

Diplomatic efforts

Hamas political leaders have denied any knowledge of the tank gunner's whereabouts - but they have called for him to be well treated.

The faxed statement calling for the prisoners' release was signed by the Popular Resistance Committees umbrella group, Hamas's Izzedine al-Qassam Brigades, and the previously unknown Army of Islam.

It said: "The Occupation [Israel] will not get any information about its missing soldier until it commits to the following:

"First, the immediate release of all women in prison. Second, the immediate release of all children in prison younger than 18."

Israel is believed to have incarcerated about 100 women and 300 under-18s among the 9,000 Palestinian prisoners it is holding in its jails.

Intense diplomatic efforts have been under way since the soldier's disappearance, including mediation by an Egyptian delegation in the Gaza Strip.

This was noted by the kidnappers themselves, who said their demands were "in response to various mediation efforts and other intervention".

The statement did not confirm whether the three groups were holding Cpl Shalit captive themselves.

Israeli officials say they hold Palestinian Authority President Mahmoud Abbas and Prime Minister Ismail Haniya, of Hamas, responsible for the 19-year-old Israeli's safety.

Correspondents say the crisis could spoil efforts to bind Hamas into a plan implicitly recognising Israel, and may expose divisions between hardline and more pragmatic Hamas elements.

Speaking to Army Radio, the far right-wing MK also called for the dismissal of Defense Minister Amir Peretz whom, he said, is managing a "spineless" course of action.

"We need to tell Haniyeh and the Hamas leaders that after a Qassam rocket barrage on Sderot, we will turn their homes into soccer fields. We won't harm innocent people but will give them half an hour to leave [their homes]," Lieberman said. Security cabinet member Minister Meir Sheetrit called Lieberman's comments irresponsible.

"He thinks he lives on a different planet. The soldier's life is now hanging in the balance. Does he think that if we bring Haniyeh, the soldier will be freed tomorrow? And if they kill him?" Sheetrit said.

Opposition members on Sunday called on the government to take harsh measures in response to the cross-border Palestinian attack at Kerem Shalom.

National Union-National Religious Party MK Effi Eitam said, "This was a land-based incursion across an international border into the sovereign territory of the State of Israel. This happens after there is no longer an occupation and no Israel presence [in Gaza], when there is an elected Palestinian government --that has chosen war. This is a declaration of war against Israel."