Iran's nuclear programme has alarmed Western powers
Iran's President Mahmoud Ahmadinejad has asked the country's nuclear chief to begin enriching uranium to 20%.
The move comes amid a worsening stand-off over a Western offer for Iran to swap enriched uranium for nuclear fuel.
Western nations say they fear Iran is trying to develop nuclear weapons and have threatened new sanctions. Iran insists its programme is peaceful.
The US defence secretary urged the world to "stand together", saying there was still time for sanctions to work.
"Pressures that are focused on the government of Iran, as opposed to the people of Iran, potentially have greater opportunity to achieve the objective," Robert Gates said during a visit to Italy.
In London, the Foreign Office said Mr Ahmadinejad's announcement was "clearly a matter of serious concern".
"This would be a deliberate breach of five UNSCRs [United Nations Security Council Resolutions]," it said in a statement.
Robert Gates: "Sanctions and pressure can work"
In January, diplomats said Iran had informed the International Atomic Energy Agency (IAEA) that it did not accept the terms of the deal agreed in October by Iran, the IAEA and the P5+1 - the US, Russia, China, UK and France plus Germany.
Earlier this week, the US, Britain and France circulated a discussion paper on further possible sanctions against Tehran.
But China says the P5+1 must remain patient and keep pursuing a diplomatic solution to the issue.
Mr Ahmadinejad made the announcement on Iranian state television - two days after his foreign minister said a deal on swapping enriched uranium for nuclear fuel was close - a claim greeted with scepticism by Western powers.
"I had said let us give them [Western powers] two to three months, and if they don't agree, we would start ourselves," Mr Ahmadinejad said in a speech broadcast live.
"Now Dr [Ali Akbar] Salehi, start to make the 20% with the centrifuges," the president said, addressing Iran's nuclear chief who was sitting in the audience at a laser technology plant in Tehran.
NUCLEAR FUEL CYCLE
Mined uranium ore is purified and reconstituted into solid form known as yellowcake
Yellowcake is chemically processed and converted into Uranium Hexafluoride gas
Gas is fed through centrifuges, where its isotopes separate and process is repeated until uranium is enriched
Low-level enriched uranium is used for nuclear fuel
Highly enriched uranium can be used in nuclear weapons
Civilian nuclear power requires uranium enriched to about 3%. Weapons grade uranium needs to be enriched to 90%.
The BBC Tehran correspondent Jon Leyne, reporting from London, says Mr Ahmadinejad's announcement crosses a significant red line.
Iran says it wants to supply a research reactor with highly enriched uranium following the breakdown of the international deal to provide fuel for it.
But some Western analysts say Iran does not possess the technical know-how to make fuel rods for the reactor, our correspondent says, and Western countries fear this could be a stepping stone towards the manufacture of weapons-grade material.
At the very least, this is a provocative act which will make negotiations more difficult, our correspondent says.
Existing UN sanctions are meant to prevent the flow of any items or technology which might aid Iran in enriching uranium or developing nuclear weapon delivery systems.
The sanctions range from actual sales or supplies to dealings with named individuals.
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