LONDON - Prime Minister Tony Blair warned Tuesday that his government could make public evidence that a British navy crew was in Iraqi waters when it was captured by Iran, saying he was prepared to take the standoff to a "different phase" if diplomacy fails to win their release.

A supporter of the National Council of Resistance of Iran, stands with a placard outside the Foreign and Commonwealth Office in London, during a demonstration calling on Britain to stand firm against Tehran, and to accept the ruling of the European Court of Justice to remove People's Mujahdeen Organisation of Iran from the European Union terror list, Tuesday, March 27, 2007. [AP]

Iran said the 15 British sailors and marines were being treated well, but refused to say where they were being held, or rule out the possibility that they could be brought to trial for allegedly entering Iranian waters.

"I hope we manage to get them to realize they have to release them," Blair said in an interview with GMTV. "If not, then this will move into a different phase."

Blair's spokesman said the prime minister was not hinting either at the possible expulsion of Iranian diplomats or military action, but that Britain may have to make public evidence proving the Britons were seized in Iraqi - not Iranian - waters, if there is no swift release of the sailors.

Releasing such evidence could have "an upside and a downside" because it could show the Iranian ships strayed into Iraqi territory and provoke a diplomatic row between the neighbors, the spokesman said on condition of anonymity in line with policy.

Britain and the United States have said the sailors and marines were intercepted Friday after they completed a search of a civilian vessel in the Iraqi part of the Shatt al-Arab waterway, where the border between Iran and Iraq has been disputed for centuries.

There were fears in Britain that the fate of the 15 could get caught up in the political tensions between Iran and the West, including the dispute over Iran's nuclear program and accusations of Iranian help to Shiite militants in Iraq.

On Tuesday, the US Navy began its largest demonstration of force in the Persian Gulf since the 2003 invasion of Iraq, with warplanes from two aircraft carriers flying simulated attack maneuvers off the coast of Iran.

Related readings:  Blair hopes diplomacy gets sailors back  Iran: Brit sailors may face charges  Blair calls capture of sailors 'serious'  Iran denounces British sailors for entering its waters  Iran: British sailors admitted aggression  Iran seizes 15 British sailors

US commanders insisted the exercises were not a direct response to the seizure of the British sailors and marines, but they also made clear that the flexing of the Navy's military might was intended as a warning to Iran.

Meanwhile, the US military denied reports Tuesday that Iran fired a missile at a US ship in the Persian Gulf. The rumors of an attack had sent oil prices soaring more than 8 percent in after-hours trading. Lt. Cmdr. Charlie Brown of the US Navy 5th Fleet said all ships in the Gulf had been checked and the rumors were untrue.

The British government on Tuesday also denied it was involved in any action in the region.

"There have certainly been no developments on our side in the last few hours," a Foreign Office spokeswoman in London said, on condition of anonymity in line with government policy.

Also Tuesday, the Foreign Affairs Committee in the US House of Representatives approved a resolution demanding the release of the British soldiers.

In London, Foreign Secretary Margaret Beckett called Iran's foreign minister for the second time and demanded the Britons' swift release in "very robust terms", the Foreign Office said.

Blair's spokesman did not specify if Britain had set a deadline for the naval crew's release but said negotiations would not be "indefinite."

He also refused to say if satellite images or GPS coordinates had been shown to Iranian authorities and declined to reveal which territorial boundaries in the waterway Britain recognizes.

Iran has said it is questioning the British sailors and marines to determine if their alleged entry into Iranian waters was "intentional or unintentional" before deciding what to do with them - a sign Tehran could be seeking a way out of the standoff.

The dispute helped drive up international oil prices Monday, but they fell Tuesday, reflecting hopes of a peaceful resolution.

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