The UN Security Council resolution requires Iran to halt uranium enrichment and other sensitive nuclear fuel work by August 31 or face the prospect of sanctions.

"This resolution has no legal credibility and it negates the purpose of the (International Atomic Energy) Agency," Larijani said.

The resolution was pushed through after Iran ignored a previous non-binding deadline and failed to respond to an international offer of a package of incentives in exchange for a moratorium on nuclear fuel work.

Iran, OPEC's second largest oil exporter, insists it wants to enrich uranium only to make reactor fuel for power stations, but there is widespread suspicion the country wants the capacity to make weapons-grade uranium.

And Larijani warned world powers against imposing sanctions, suggesting that Iran could use oil as a weapon.

"It will have a huge international impact. They will lose more than us. They should not do something that will leave them shivering in winter".

Larijani also said that Iran could expand its nuclear activities by increasing the cascade of centrifuges used for uranium enrichment.

In April, Iran said it had successfully enriched uranium to 3.5 percent using 164 centrifuges. It also plans to install 3,000 centrifuges at its enrichment plant in Natanz, central Iran, by the end of the Iranian year in March 2007.

To reach weapons-grade material, the enrichment level has to reach more than 90 percent.

Larijani however said that Iran was still studying the package of incentives offered by Britain, China, France, Germany, Russia and the United States on June 6, saying it "had the potential to resolve the nuclear issues".

The package, handed to Tehran on June 6, offers trade, technology, diplomatic and other incentives as well as multilateral talks -- also involving the United States -- if Iran agrees to freeze enrichment.

Larijani said Iran would respond to the offer by August 22, but that the UN resolution had "badly affected the opportunity (represented by the offer) and our attitude".

"The question is not what Iran's response will be, but to create an atmosphere to pursue the process (of negotiations)."

"The proposal has positive points as well as ambiguities. Negotiations must be constructive and away from pressure, to enable the ambiguities to be removed," he added.

"Even if they (the UN Security Council members) have any reasons to (demand) suspension of enrichment they should address them in negotiations. But they cannot prescribe it before talks," he said.

The Security Council has charged IAEA chief Mohammed ElBaradei with reporting back on Iranian compliance.

If it does not comply, the council would consider adopting "appropriate measures" under Article 41 of Chapter 7 of the UN Charter, which relates to economic sanctions.

Iran is the world's fourth largest oil exporter and is estimated to have the second largest oil and gas reserves.

Global energy prices could be expected to reach new highs if Tehran's threat is carried out - although analysts point out that one of the first economic casualties might be Iran itself.

Urged on by Britain, the US, France and Germany, the UN security council passed a resolution last week imposing a deadline of August 31 for Iran to accept a western package of incentives in return for suspending uranium enrichment at its Natanz facility, or face the prospect of political, economic and financial sanctions.

Mr Larijani rejected the resolution as "illegal" and said Iran would not abide by the deadline. He reiterated Tehran's argument, repeated during the course of three years of largely fruitless negotiations with the "EU three" (Britain, France and Germany), that Iran was legally entitled to pursue uranium enrichment for peaceful purposes under the terms of the 1970 nuclear non-proliferation treaty (NPT).

"We won't accept suspension. Such resolutions will not have any impact on our behaviour," he said. He went on to warn that Iran was prepared to further expand its nuclear research activities "if required". That could include building additional cascades of centrifuges at Natanz for enrichment purposes.

Iran has built a cascade of 164 centrifuges and announced plans to build 3,000 this year. Experts say it would need more than 50,000 centrifuges for industrial production of low-grade enriched uranium, a process that could take years.

Tehran insists its aim is to increase Iran's ability to generate electricity for domestic use. The US and others believe the technology could be used to enrich uranium to atomic weapons grade.

Mohammad Saeidi, vice-president of Iran's Atomic Energy Organisation, said yesterday that Iran needed to find alternative energy supplies because its fossil fuel resources would run out in 25-30 years' time. "In the 21st century, the only way for any country to provide electricity is nuclear power." This was the same conclusion that Britain, France, the US and many others had reached, he added.

Mr Saeidi said Iran's nuclear facilities and future power stations would continue to be open to inspection by the UN's International Atomic Energy Agency (IAEA) under the terms of the NPT. If an agreement was reached with the western countries, short-notice challenge inspections under the "additional protocol" could be resumed, he said. It was "impossible" for Iran to divert materials for bomb-making purposes under such an intrusive inspection regime, he added.

Iranian officials said yesterday there would be a formal response to the west's nuclear offer on August 22, as previously announced by President Mahmoud Ahmadinejad. While Tehran was likely to reject demands that it suspend enrichment immediately, the officials said the government would offer to resume negotiations on all outstanding issues without preconditions.

But pressure from hardliners in parliament is increasing. They are demanding that if sanctions are imposed Iran should discontinue cooperation with the IAEA and suspend its NPT membership.

"This is part of a psychological war which the Americans resort to once in a while to feed the public mind," Larijani added.

Citing a senior Tanzanian customs officer, the British daily Sunday Times reported that a huge shipment of uranium 238, or U-238, bound for Iran's southern port of Bandar Abbas was intercepted on October 22, 2005 by customs officials in Tanzania during a routine check.

The British publication also cited a United Nations report, due to be considered by the Security Council, which said there was "no doubt" that a large shipment of U-238 discovered in Tanzania was transported from the Lubumbashi mines in the DR Congo.

The unnamed customs official said the uranium shipment was found hidden in a consignment of coltan, a rare mineral, which was destined for smelting in Kazakhstan after being transported through the Iranian port.

U-238 is the stable heavyweight isotope which comprises more than 99 percent of raw uranium ore, but it is the lighter weight fissile isotope U-235, less than one percent of raw ore, which is the focus of enrichment processing because it can produce energy by splitting into smaller fragments.

Larijani on Sunday also said his country would not suspend uranium enrichment, in a clear rejection of a UN resolution calling for a freeze of the sensitive nuclear work.

Iran insists it wants to enrich uranium only to make reactor fuel for power stations but the West suspect Tehran wants the capacity to make weapons-grade uranium.

A recent UN resolution called on Iran to halt uranium enrichment and other sensitive nuclear fuel work by August 31 or face the prospect of sanctions.

Sgt Paul Cortez, Specialist James Barker, Pte Jesse Spielman and Pte Bryan Howard face charges of rape and murder. According to an FBI affidavit, the men changed into civilian clothes after a drinking session and walked to the victims' house, 200 metres from their military checkpoint in a Sunni area south of Baghdad. After the attack the soldiers are accused of setting fire to the victim's body in an attempt to cover their tracks.

Steven Green, also accused of taking part in the attack but no longer in the US Army, was arrested in North Carolina in June and has pleaded not guilty to a federal court. He is being held without bond. Sgt Anthony Yribe is charged with failing to report the attack but is not alleged to have taken part.

Mindful that any perceived leniency will strain relations with the newly elected Iraqi government, US officials have assured Iraqis that the accusations will be taken seriously and that if found guilty, the four soldiers will be severely punished. The Prime Minister, Nouri al-Maliki, has demanded an independent investigation.

Reporters are prevented from observing the hearing, and the witnesses' identities are being kept secret for fear they could be targeted by insurgents for collaborating with US authorities. But yesterday, after the secret testimony of two other witnesses, reporters were allowed in to hear the medic's account. Military prosecutors showed the man a series of gory images of the crime scene to confirm whether the bodies were in the same position as when he entered the house.

Defence attorneys alleged the photos were staged and questioned whether the victims were already dead when they were sprayed with American bullets. The lawyer for Specialist Barker said the soldiers' behaviour was influenced by the stressful environment in the Mahmoudiya area, known as the "Triangle of Death".

If a court martial is given the go-ahead and the soldiers are then found guilty, those accused of murder could face the death penalty.

The case is the latest in a series of alleged atrocities that have undermined American efforts to quell the insurgency in Iraq.

Two US military inquiries have been investigating the alleged massacre of 24 Iraqi civilians by US Marines in the town of Haditha.

Four other American soldiers are accused of murdering three Iraqi detainees near Samarra in May. Earlier this month a military prosecutor called the men "war criminals" as he called for them to face a court martial, but a hearing ended on Friday without a decision on any future trial.

In another case, seven US Marines and a navy sailor are accused of killing a disabled Iraqi man in Hamdaniya four months ago.

But Mr Larijani added that if the west did decide on sanctions, "we will react in a way that would be painful for them ... Do not force us to do something that will make people shiver in the cold."

Iran is the world's fourth largest oil exporter and is estimated to have the second largest oil and gas reserves.

Global energy prices could be expected to reach new highs if Tehran's threat is carried out - although analysts point out that one of the first economic casualties might be Iran itself.

Urged on by Britain, the US, France and Germany, the UN security council passed a resolution last week imposing a deadline of August 31 for Iran to accept a western package of incentives in return for suspending uranium enrichment at its Natanz facility, or face the prospect of political, economic and financial sanctions.

Mr Larijani rejected the resolution as "illegal" and said Iran would not abide by the deadline. He reiterated Tehran's argument, repeated during the course of three years of largely fruitless negotiations with the "EU three" (Britain, France and Germany), that Iran was legally entitled to pursue uranium enrichment for peaceful purposes under the terms of the 1970 nuclear non-proliferation treaty (NPT).

"We won't accept suspension. Such resolutions will not have any impact on our behaviour," he said. He went on to warn that Iran was prepared to further expand its nuclear research activities "if required". That could include building additional cascades of centrifuges at Natanz for enrichment purposes.

Iran has built a cascade of 164 centrifuges and announced plans to build 3,000 this year. Experts say it would need more than 50,000 centrifuges for industrial production of low-grade enriched uranium, a process that could take years.

Tehran insists its aim is to increase Iran's ability to generate electricity for domestic use. The US and others believe the technology could be used to enrich uranium to atomic weapons grade.

Mohammad Saeidi, vice-president of Iran's Atomic Energy Organisation, said yesterday that Iran needed to find alternative energy supplies because its fossil fuel resources would run out in 25-30 years' time. "In the 21st century, the only way for any country to provide electricity is nuclear power." This was the same conclusion that Britain, France, the US and many others had reached, he added.

Mr Saeidi said Iran's nuclear facilities and future power stations would continue to be open to inspection by the UN's International Atomic Energy Agency (IAEA) under the terms of the NPT. If an agreement was reached with the western countries, short-notice challenge inspections under the "additional protocol" could be resumed, he said. It was "impossible" for Iran to divert materials for bomb-making purposes under such an intrusive inspection regime, he added.

Iranian officials said yesterday there would be a formal response to the west's nuclear offer on August 22, as previously announced by President Mahmoud Ahmadinejad. While Tehran was likely to reject demands that it suspend enrichment immediately, the officials said the government would offer to resume negotiations on all outstanding issues without preconditions.

But pressure from hardliners in parliament is increasing. They are demanding that if sanctions are imposed Iran should discontinue cooperation with the IAEA and suspend its NPT membership.

The U.N. Security Council has demanded Iran end its atomic work by the end of this month after Tehran failed to convince the international community its atomic scientists were only working on power stations and not on bombs.

Washington has declined to rule out military strikes as a solution to the nuclear dispute.

Although Tehran argues its support for Hizbollah is purely moral, Israel insists many of the rockets being fired against its civilian and military targets are Iranian made. Washington also accuses Tehran of actively funding Hizbollah.

Iran's Revolutionary Guards are traditionally very close to fellow Shi'ite Muslims in Hizbollah and were deployed in south Lebanon in the 1980s.

Israel launched an offensive against south Lebanon on July 12 after Hizbollah captured two of its soldiers.

Iran's Shahab-3 missiles are deployed with the Revolutionary Guards. With a range of 2,000 km (1,200 miles), these weapons can hit Israel and U.S. bases in the Gulf.

© Reuters 2006. All Rights Reserved.

"The American and Iraqi army raided Sadr City to arrest a number of Sadr militiamen. They arrived near a house, and militiamen opened fire on them. They exchanged fire," an Iraqi defence official told AFP.

"The fight continued for two hours. As a result two militiamen were killed, three other wounded. Two Iraqi soliers were wounded," he said.

Staff at the Imam Ali hospital said three civilians were killed -- including a woman and a three-year-old girl -- and 18 wounded.

An AFP journalist in Sadr City reported that the raid on the area, a stronghold of the firebrand cleric, was accompanied by air strikes.

The head of Sadr's office in Sadr City, Abdulzahra Al-Suwaidi, claimed that the raid had targeted Mehdi Army supporters to punish them for holding an anti-American and anti-Israeli street rally on Friday.

"Because of the demonstration the occupation forces raided and carried out air strikes, killing and wounding people and burning several houses," he said.

But according to a statement from the US-led coalition, the operation was aimed at "individuals involved in punishment and torture cell activities".

Sadr's militiamen are widely alleged to have taken part in a wave of sectarian and political murders across Baghdad in recent months, although coalition and Iraqi officials are careful never to accuse it publicly.

"Iraqi forces, and their coalition advisers, began taking fire immediately upon arrival at their objective; the fire lasted for the duration of the operation and continued as they left the neighbourhood," the US statement said.

"Additionally, two large fires of unknown origin were observed by the Iraqi forces as they left their objective," it added. One coalition soldier was injured in the firefight.

US generals have made winning back Baghdad for the Iraqi government their priority, after violence split the city on sectarian lines and a vicious war between rival Sunni and Shiite death squads left thousands dead.

The US military also announced on Monday the deaths of three soldiers in a separate incident southwest of the city.

The deaths were the first US casualties in Baghdad since reinforcements began arriving Saturday to quell the raging sectarian violence that has engulfed Baghdad despite a massive security crackdown since June.

About 3,700 troops of the 172nd Stryker Brigade Combat Team, equipped with 17-tonne "Stryker" armoured vehicles, are taking positions in some of the most violent districts of the capital.

The fatalities took the US military death toll in Iraq since the March 2003 invasion to 2,590, according to an AFP count based on Pentagon figures.

Late on Sunday, at least 15 people including a provincial council member were killed when a suicide bomber blew himself up in the midst of mourners in Tikrit, hometown of Iraq's ousted leader Saddam Hussein, police said.

At least 30 others were wounded in the attack, they added.