By Paul Reynolds
World affairs correspondent, BBC News website
President Ahmadinejad: Not afraid of confronting the West
Just as the Middle East reels from the impact of the Hezbollah-Israel war, a new confrontation involving Iran might be about to break out.
On Tuesday Iran gave its formal reply to an offer by the European Union, backed by the United States, for trade and other concessions if Iran suspends its enrichment of uranium.
The offer has been endorsed by the Security Council which itself set 31 August as the deadline for Iranian compliance so the Iranian response to the EU is being seen as its effective response to the UN as well.
It appears that Iran has suggested that it might talk about suspension but will not accept this as a precondition.
Its chief negotiator Ali Larijani was quoted as saying that Iran was willing to enter into "serious negotiations" but he did not indicate whether it would agree to the Security Council demand for suspension by 31 August.
However he referred to the Security Council involvement as "illegal".
Anything short of a clear commitment to suspension in advance of talks will be taken as a negative answer by the United States at least.
A fairly large clue as to Iran's underlying position came from its supreme leader, Ali Khamenei, who said on Monday that Iran would "continue on its path".
This new potential crisis has come at a dangerous time, with relations between the West and the Muslim world already extremely sensitive and fraught.
Iran is buoyed by what it sees as its ally Hezbollah's victory against Israel, and in President Ahmadinejad it has a political leader who appears to welcome confrontation with the West.
It is therefore in no mood to compromise over enrichment, though some had hoped that it might be able to announce a so-called "technical pause" to allow talks to start.
If its answer on suspension is "No", the United States will press for diplomatic and economic sanctions. These would need a new vote in the Security Council, and in the past Russia and China, both veto holders, have opposed sanctions.
Possible military action
Beyond the issue of sanctions, however, there are experts who fear that confrontation could in due course mean military action.
Mark Fitzpatrick, senior fellow in non-proliferation at the International Institute for Strategic Studies in London, said: "This won't drag on for years. There are two deadlines of sorts at the end of 2008. That is the earliest date by which some people think Iran could acquire a nuclear weapon. I think the date is more like 2010.
"And on November 2008, there is the US presidential election. President Bush will be inclined not to let this problem be passed on. There will be a growing mood in the US administration to take other action."
Asked if Israel's problems in disarming Hezbollah showed the limitations of air power and might therefore make an attack on Iran less likely, he replied: "Israel's actions make an attack on Iran more likely as it removes one of Iran's retaliatory tools, an attack on Israel by Hezbollah. This has now been pre-empted."
This view echoes to some extent one put forward in the New Yorker recently by Seymour Hersh, who argued that the attack on Hezbollah was a dry-run for one on Iran. But you do not have to accept that theory to conclude that the military option against Iran is not inconceivable.
But other experts disagree. Alex Vatanka, US security editor at Jane's Information Group said: "The case for a successful military action against Iran is still to be made. For long-term success, US military action would only make sense if one could guarantee the removal of the current regime as a result of the military action or bring about change in the regimes behaviour. Otherwise, given the current dynamics of the Middle East, the costs of limited strategic air strikes against Iran is likely higher than the benefits."
In the shorter term, however, the emphasis will be on sanctions.
On 31 July, the Security Council (in Resolution 1696) gave Iran a month in which to comply with the earlier demands of the UN's nuclear agency, the International Atomic Energy Agency (IAEA).
The IAEA said that Iran should suspend enrichment, reconsider the construction of a heavy-water nuclear reactor, ratify and implement a stricter inspection regime already agreed, and co-operate fully with the IAEA inspectors.
The IAEA will report on Iranian compliance at the end of August. If there is none, then the next stage will be reached.
Any sanctions will have to be diplomatic or economic in nature. This is because resolution 1696 states that they would be authorised under Article 41 of Chapter VII of the UN Charter. This says that measures cannot be ones "involving the use of armed force".
The US and its allies (including the UK, and on this occasion probably France and Germany as well) fear that Iran will one day use the enrichment technology not just for nuclear fuel but for a nuclear bomb, though Iran says that is not its intention.
The US will press for travel restrictions to be imposed on Iranians involved in the nuclear programme, and for a ban on the sale of goods that could be used in the nuclear field and on dual-use items.
But Russia and China might object. They have never been keen on sanctions and prefer negotiations.
If sanctions do not get approved, a so-called "coalition of the willing" might be formed by those countries wanting to go further. They might also consider a ban on investing in Iran's oil and gas industry, a restriction the US has itself imposed since 1979.
Sanctions impact minimal
Frankly, few if anyone involved in contacts with Iran over the past few years think that sanctions will be effective. Iran has lived with American sanctions for 27 years and these have made no difference to Iranian policy, though there has been an economic impact.
Iran seems determined to press on, resting on its rights to enrich under the Treaty on the Non-Proliferation of Nuclear Weapons (known as the NPT) and turning the whole issue into one in which a developing nation is being forced to abandon a modern technology by richer countries that already have it.
In an interview with the Guardian newspaper, the chief Iranian negotiator Ali Larijani put it this way: "We don't see why we should stop the scientific research of our country.
"We understand why this is very sensitive. But they [the West] are categorising countries. Some countries can have access to high nuclear technology, the others are told they can produce fruit juice and pears!"