Iran's showdown with the West led to warnings that the row is sliding into dangerous territory, as international alarm over a new uranium enrichment plant raised the stakes.
Both sides were digging in on Tuesday, with Iran's defiance hardening and the United States and European Union actively taking steps to fracture the Iranian economy through further sanctions.
The heightened tension came after the UN atomic agency's confirmation Monday that Iran had begun enriching uranium in a new, underground bunker southwest of Tehran.
This announcement was seized upon by the US, Britain, France and Germany as an unacceptable violation of UN Security Council resolutions.
US Secretary of State Hillary Clinton said Tuesday there was "no plausible justification" for Iran's production of enriched uranium at a new site, again calling on Tehran to cease all such work.
In a toughening of tone from Washington, Clinton said confirmation from the UN atomic watchdog that Iran had begun enriching uranium at a new, underground bunker southwest of Tehran was "especially troubling."
China, which rejects sanctions, warned of disastrous consequences if the Iranian nuclear row escalates into conflict, while Japan said it was "very concerned".
Russia, which has relatively close ties with Iran, also voiced concern on over the new plant.
"Moscow has with regret and worry received the news of the start of work on enriching uranium at the Iranian plant," the foreign ministry was quoted as saying by the ITAR-TASS news agency.
Iran's envoy to the International Atomic Energy Agency (IAEA), Ali Asghar Soltanieh, said the the West's stance was "politically motivated".
The underground Fordo plant had been revealed two years ago and documented, he said. The 20-percent enriched uranium it was to produce would be used for "peaceful and humanitarian" purposes, namely isotopes for cancer treatment, he said.
Both Soltanieh and the IAEA stressed the UN nuclear watchdog had 24-hour cameras there and inspectors to keep it under watch.
Such assurances could not reassure Washington or its chief Middle East ally, Israel, analysts said.
"Israel, which has already warned Iran that it could take military action against installations, is very, very worried by this facility... We are moving into dangerous territory," said Mark Hibbs of the Carnegie Endowment for International Peace.
But while Iran downplayed the significance of Fordo -- and affirmed it was ready to resume nuclear talks with world powers that collapsed a year ago -- it continued to send tough signals to states contemplating further sanctions.
Its elite Revolutionary Guards have said they are about to launch new navy manoeuvres in the Strait of Hormuz, at the entrance of the Gulf, a move aimed at showing the Islamic republic can close the waterway if its oil exports are blocked or severely curtailed.
Meanwhile a US ship rescued six Iranian mariners in the Gulf, after their boat broke down, the Pentagon said, in the latest such gesture despite the soaring tensions between Washington and Tehran.
China, which buys 20-22 percent of Iran's crude oil, warned against conflict.
"We urge all relevant nations to... refrain from taking actions that will intensify the situation and make common efforts to prevent war," Chen Xiaodong, a top Chinese diplomat on Middle East affairs said in an online interview with his country's state press.
The United States has said closing the strait would be a "red line" and it would continue deploying its warships to the Gulf.
Oil prices rose strongly in line with rising equities and the weak dollar, and as simmering tensions in Iran and Nigeria also provided support, analysts said.
Brent North Sea crude for February jumped 83 cents to $113.28 (Dh530.26) by the close of trade Tuesday.
The European Union, meanwhile, was poised to declare a ban on Iranian oil imports.
An EU foreign ministers' meeting on the issue scheduled for the end of this month has been brought forward to January 23, an EU official told AFP.
French Foreign Minister Alain Juppe said other major oil exporters would increase their production in order to steady world markets if the embargo is imposed.
"We have made discreet contacts in this direction. The producers don't want to talk about it, but they are standing ready," Juppe said.
On New Year's Eve, US President Barack Obama signed into law sanctions against Iran's central bank due to come into effect within months.
And Treasury Secretary Timothy Geithner was in Beijing in an effort to get China to drop its steadfast opposition to new sanctions on Iran and to come on board, at least to some extent.
Iran depends on oil sales for 60 percent of its government revenues and last year, it earned about $100 billion from petroleum exports. Existing sanctions have complicated payment, though.
For his part, Iranian President Mahmoud Ahmadinejad said that his country was "fighting to establish solidarity and justice".
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