UK Prime Minister Tony Blair says Iran's decision to resume its nuclear activities is likely to result in a referral to the UN Security Council.
Western powers suspect Iran's nuclear ambitions are not peaceful
Speaking in parliament, Mr Blair said European ministers meeting in Berlin on Thursday would decide how to proceed.
A US state department spokesman also said it was now "more likely than ever" that the case would be sent to the UN.
But Iran's leader dismissed the threat. He said the research would go on despite the Western "fuss".
'Spoiling for a fight'
Tehran says it broke the United Nations seals on the Natanz nuclear research facility on Tuesday because it wants to produce electricity, not because it is pursuing nuclear weapons.
IRAN'S NUCLEAR STANDOFF
Sept 2002: Work begins on Iran's first reactor at Bushehr
Dec 2002: Satellites reveal Arak and Natanz sites triggering IAEA inspections
Nov 2003: Iran suspends uranium enrichment and allows tougher inspections
June 2004: IAEA rebukes Iran for not fully co-operating
Nov 2004: Iran suspends enrichment under deal with EU
Aug 2005: Iran rejects EU plan and re-opens Isfahan plant
Jan 2006: Iran re-opens Natanz facility
The UN nuclear watchdog, the International Atomic Energy Agency (IAEA), has said Tehran is about to start small-scale nuclear enrichment.
Addressing MPs in the House of Commons, Mr Blair described the current situation as "very serious indeed".
"I don't think there is any point in us hiding our deep dismay at what Iran has decided to do," he said.
"When taken in conjunction with their other comments about the state of Israel they cause real and serious alarm right across the world."
Russian Defence Minister Sergei Ivanov said it was a personal disappointment giving him cause for alarm.
Course of action
On Thursday UK Foreign Minister Jack Straw will meet French Foreign Minister Philippe Douste-Blazy, Frank-Walter Steinmeier of Germany and Javier Solana, the EU foreign policy chief to discuss the crisis.
The EU talks could trigger an emergency meeting of the IAEA's board of governors which could refer the matter to the UN Security Council and lead to full-scale sanctions.
But President Mahmoud Ahmadinejad said Iran would not be intimidated by "all of the fuss created by the big powers".
The BBC's Frances Harrison in Tehran says that Iran's conservative president seems almost to be relishing the sense of looming confrontation - and that those who had suggested Iran was just testing the waters look set to be disappointed.
Iran is banking on divisions within the international community, our correspondent says.
Its parliament has passed a law obliging the Iranian government to stop short notice visits of its nuclear sites by UN inspectors if it is referred to the UN Security Council.