Iran's supreme religious leader Ayatollah Ali Khamenei said on Monday Tehran would pursue its nuclear program despite a U.N. Security Council demand to stop enriching uranium by August 31 or face possible sanctions.

A TV grab taken from Iran's state television shows the new short-range missile called Saegheh or lightning in Farsi test-fired during the second day of the military manoeuvers at Sistan-Baluchestan province, east of city of Zahedan near the Pakistani border. The surface-to-surface missile has a range of between 80 and 250 kilometers (50 and 155 miles).[AFP]

Iran is to formally reply on Tuesday to a trade and technology offer from major powers in return for an enrichment halt. The deal is designed to allay Western fears Iran wants to build atomic bombs. Tehran says its program is only for power.

"The Islamic Republic of Iran has made its decision and, in the issue of nuclear energy, will continue its path powerfully ... and it will receive the sweet fruits of its efforts," said Khamenei, who has the final word in Tehran.

Khamenei, whose comments were quoted on state television, did not specifically mention enrichment but senior officials have repeated in the past few days Iran would not be stopped.

The deputy head of Iran's Atomic Energy Organization joined the chorus. "Considering the technical advancement of Iranian scientists, the suspension of uranium enrichment is not possible any more," Mohammad Saeedi told Iran's Fars News Agency.

In June, the United States, Russia, China, Britain, France and Germany offered Iran economic and other incentives if it halted uranium enrichment, which can yield nuclear power plant fuel or potentially atomic bombs.

President Bush said there had to be "consequences" for Iran if it ignored the U.N. Security Council. "It's up to the international community ... to work in concert for effective diplomacy, and that begins at the United Nations Security Council," Bush said in Washington.

Iran has suggested it will not give a simple "Yes" or "No" to the package but rather a "multi-dimensional" reply.

Tehran says it wants more talks. Western diplomats say Iran must halt enrichment first. Anything short of that is likely to be viewed as a rebuff of the offer in Western capitals.

A senior Iranian official said Iran would respond in writing, possibly handing it to the British, French and German ambassadors in Tehran but more likely delivering it to the European Union's Javier Solana in Brussels.

Solana, the EU foreign policy chief who handed Iran the package in June, did not react to Khamenei's statement, saying he expected the formal reply and that both sides were open to further contacts "under the right circumstances."

The U.S. envoy to the United Nations, John Bolton, told reporters: "The Security Council gave them until (August 31) to complete the suspension of their uranium enrichment activities, so they still have a few days."

U.N. INSPECTORS

In the countdown to the deadline, which Iran has denounced as illegal and worthless, tensions have risen between Tehran and the watchdog International Atomic Energy Agency (IAEA), diplomats familiar with IAEA operations say.

One diplomat said Tehran "created some difficulties and complications" for IAEA inspectors visiting Iran last week to prepare for an August 31 report to the Security Council. "The tour did not go so well," said the diplomat, without elaborating.

Another diplomat said the inspectors were denied access to the partially built underground section of Iran's Natanz nuclear fuel plant that they had previously been allowed to look at.

But he said Iran's action did not appear to violate the nuclear Non-Proliferation Treaty as it does not obligate Tehran to show inspectors sites not handling nuclear materials.

The subterranean section is earmarked for industrial output of enriched uranium and remains under construction.

Inspectors were able to check Natanz's pilot centrifuge plant which began enriching uranium in April, the diplomat said.

A senior Iranian official denied inspectors were blocked. "Last week, they visited the Natanz facility and next week they are going to visit it. This story is totally baseless," he said.

Diplomats say Iran has also refused entry to a veteran IAEA centrifuge expert and has cut back on multiple-entry visas that help the IAEA maintain regular access to nuclear installations.

Iran, the world's fourth largest oil exporter, says it has the right to enrich uranium under international treaty wording and says it will use the technology to produce electricity.

Western diplomats say Iran must prove its aims are entirely peaceful for that right and the IAEA says questions must be answered before it can give Iran a clean bill on its program.

Iran may calculate that divisions in the Security Council mean it faces only modest sanctions, such as asset freezes or travel restrictions on officials, that it can tolerate.

Western leaders regard Iran as a risk to world peace, while Russia and China, key trade partners of Tehran, do not.