The enrichment would take place at Natanz. Photo by DigitalGlobe
Iran has told the UN's nuclear watchdog it will step up its nuclear programme from Tuesday, raising Western fears that it is planning to make a bomb.
Its nuclear chief, Ali Akbar Salehi, said earlier that Iran would start enriching uranium to 20% at Natanz, Iran's main uranium enrichment plant.
He added 10 new uranium enrichment plants would be built - a massive claim greeted with scepticism by experts.
The US said there was no choice now but to push for further sanctions.
French Foreign Minister Bernard Kouchner said of Iran's move: "This is real blackmail... it's very negative."
The development comes days before Iran celebrates the 31st anniversary of the Islamic Revolution on Thursday.
The event is expected to see pro- and anti-government demonstrations.
Witnesses say the situation in the Iranian capital Tehran is increasingly tense, with a series of checkpoints already set up across the city.
Tehran's envoy to the International Atomic Energy Agency (IAEA) in Vienna said on Monday he had handed in a formal letter announcing his country's plans to increase enrichment.
Jon Leyne, BBC News
Iran is stepping up the pace of its nuclear confrontation with the West.
If the aim is to have all 10 new enrichment plants running in a year, then it is almost laughably ambitious - it has taken many years to get the first plant at Natanz running and it still has problems.
But this flurry of announcements reflects the turmoil faced by President Ahmadinejad's government, as they square up for a major day of pro- and anti-government demonstrations on the anniversary of the revolution.
"Iran's official letter about commencing the 20% enrichment activity in order to provide fuel for the Tehran reactor has been handed over to the IAEA," Ali Asghar Soltanieh told Iranian TV by phone.
Iran had earlier appeared ready to exchange its low-enriched uranium for higher-grade foreign fuel but wanted changes to a UN-drafted plan.
Speaking on Sunday evening, Mr Salehi said that enriched uranium production would be halted if Iran received fuel enriched to 20% from abroad.
Iran currently enriches uranium to a level of 3.5% but requires 20% enriched uranium for its Tehran research reactor, which is meant to produce medical isotopes. A bomb would require uranium enriched to at least 90%.
To achieve 20% enrichment would be such a major step for Iran, David Albright of Washington's Institute for Science and International Security told the Associated Press news agency, it "would be going most of the rest of the way to weapon-grade uranium".
Iran says it is increasing uranium enrichment from 3.5% needed for commercial nuclear reactors
Says it will enrich to 20%, needed for a research reactor near Tehran
Weapons-grade uranium is at least 90% enriched
Experts say achieving 20% is a key step towards weapons grade
On Monday, US Defence Secretary Robert Gates said in a joint conference with French Defence Minister Herve Morin in Paris there now appeared to be no choice but to work towards new sanctions against Iran.
"The only path that is left to us at this point, it seems to me, is that pressure track, but it will require all of the international community to work together," Mr Gates said.
Mr Morin said he was in "complete agreement", adding: "We have no choice but to work on other measures."
Bernard Kouchner said Iran's move was "blackmail".
"The only thing that we can do, alas, is apply sanctions given that negotiations are not possible," he said.
The Russian foreign ministry again called on Iran to abide by its earlier agreements to send uranium abroad for enrichment.
The UN Security Council has already imposed three rounds of sanctions against Iran in an effort to make it stop all uranium enrichment activities and heavy-water projects.
Experts have poured scorn on Mr Salehi's announcement that 10 new uranium enrichment plants would be built, pointing to the cost of such an undertaking and Iran's problems obtaining components because of UN sanctions.
Mark Fitzpatrick, a proliferation expert at London's International Institute for Strategic Studies, described the proposal as a "farcical bluff".
"Iran presumably could start construction by pushing dirt around for 10 new facilities, but there is no way it could begin to construct and equip that many more plants," he told Reuters news agency.
"It is hard-pressed today even to keep the centrifuges installed at Natanz running smoothly."