Middle East Correspondent Jim Muir: "It is a tinderbox situation"

Tehran radio said Taleban militiamen fired light and heavy weapons at a border post in the Salehabad region of Torbat-e-Jam, in the north of Khorasan province, at 6:30 am local time (0300 GMT).

Iranian Revolutionary Guards "severely responded," forcing the Taliban forces to retreat, it said.

Taleban denial

A Taleban spokesman in Kandahar said the Iranian statement was a lie, and there had been no firing from the Afghan side of the border. He accused Iran of seeking a pretext for a wider conflict.

The clash was reported shortly after the United Nations envoy for Afghanistan, Lakhdar Brahimi left Tehran expressing optimism that the threat of war was diminishing.

Iranian television announces the attack (in Persian)

Iran sent tens of thousands of extra troops to the Afghan border, after the Taleban expanded its area of control in Afghanistan in August and September by driving back Iranian-backed groups.

Last week tension rose further between the two countries when the Taleban authorities accused Iranian planes of violating Afghan air space.

Relations between Iran and Afghanistan deteriorated after the killing in August of nine Iranian diplomats and an Iranian journalist in northern Afghanistan. Iran is currently conducting military exercises involving tens of thousands of troops on its border with Afghanistan.

The Taleban have moved their own forces to the border in response to Iran's exercises

The military manoeuvres, codenamed Zulfaqar 2, are the biggest the country has ever staged - with some 200,000 troops expected to take part.

There has been a growing war of words betwen Tehran and the Taleban; a spokesman in Kabul has warned that the Taleban would "target Iranian cities" if their territory was attacked.

No sign of apology

Taleban leaders blamed the killings of the Iranian diplomats on irregulars who seized the city from opposition forces.

Iran has demanded an apology from the Taleban and wants those who responsible for the killings to be punished.

The Taleban say the Iranians were in Mazar-e-Sharif for military and not diplomatic purposes at the time of their death.

Afghanistan is now 90% controlled by the Taleban, which wants to take over the country's seat at the United Nations, still held by the ousted government of Burhannudin Rabbani.