Iran has failed to stop enriching uranium despite a UN deadline calling for a halt to its nuclear programme, the UN nuclear agency says.
Iran insists its nuclear work is for peaceful purposes
The International Atomic Energy Agency said Tehran began a new round of uranium enrichment in recent days.
Six world powers are set to meet next week to decide on the way forward. The US is pushing for sanctions.
A senior Iranian nuclear official said the IAEA report showed Tehran had been co-operating over its nuclear work.
Iran would continue enriching uranium "within the framework of research and under the control of the IAEA", Mohammad Saeedi, deputy head of Iran's atomic energy agency, said.
US ambassador to the UN, John Bolton, described the report as a red flag and said it provided ample evidence of Iranian defiance.
He questioned Iran's refusal to say why it wanted uranium metal when "the only real use for uranium metal is a nuclear weapon".
Mr Bolton said the UN Security Council must now be ready to impose sanctions on Tehran, but said no action would be taken until EU talks with Iran next week.
EU foreign policy chief Javier Solana is due to hold face-to-face talks with Iran's chief nuclear negotiator Ali Larijani.
The talks will come a day before a meeting of the five permanent UN Security Council members and Germany on the issue, diplomats say.
French Foreign Minister Philippe Douste-Blazy said his country deplored Iran's "unsatisfactory" response, but added that he remained "convinced that the path of dialogue should remain open".
Russia and China, which can both veto action at the Security Council, have previously urged patience and said they would not support severe punishments.
"Iran has not suspended its enrichment related activities," the IAEA report was quoted as saying.
"Iran has not addressed the long outstanding verification issues or provided the necessary transparency to remove uncertainties associated with some of its activities," the report added.
Iran will not back down an inch: Mahmoud Ahmadinejad
The report said Iran started one new round of enrichment on 24 August, diplomatic sources say.
But inspectors have found no "concrete proof" that the nuclear programme "is of a military nature," one official told journalists.
Mr Saeedi said the report "does not satisfy us completely" but "indicates that the US's groundless claims were based on the US officials' illusions".
"This report carries no sign Iran's nuclear programme is not peaceful," he added.
US President George W Bush warned that there would be "consequences" for Iran if it did not meet the deadline.
"It is time for Iran to make a choice," he told a meeting of US veterans in Salt Lake City.
"We've made our choice. We will continue to work closely with our allies to plan a diplomatic solution, but there must be consequences for Iran's defiance and we must not allow Iran to develop a nuclear weapon."
Iranian President Mahmoud Ahmadinejad said Tehran would not yield to international pressure to halt its programme.
As the UN deadline expired, he denounced the US for trying to impose its will on Iran.
"The Iranian nation will not succumb to bullying, invasion and the violation of its rights," he told a crowd of thousands in the north-west.
Iran maintains it has a right to a nuclear programme which, it says, has a purely civilian aspect.
Western powers accuse Iran of trying covertly to develop a nuclear bomb.