Iran has removed international seals from a nuclear facility to begin research defying foreign pressure.
The move ends a two-year suspension of research, and could result in Tehran being referred to the UN Security Council for possible sanctions.
The UN nuclear chief said Iran planned small-scale nuclear enrichment.
Western countries fear Iran's nuclear programme could be used to make atomic bombs. But Tehran denies this, saying it wants to produce energy only.
HAVE YOUR SAY
"What we [have resumed] is merely in the field of research, not more than that," the deputy head of the Atomic Energy Organisation of Iran, Mohammad Saeedi, said on Tuesday.
"We distinguish between research on nuclear fuel technology and production of nuclear fuel. Production of nuclear fuel remains suspended."
France called the move a "grave error", and the UK said the world was running out of patience with Iran.
Condemnation
The resumption of research on Tuesday at the Natanz site suggests all of Iran's nuclear activities, apart from uranium enrichment - a key stage in making a nuclear bomb - have been revived.
The US and EU immediately condemned the latest move.
Gregory Schulte, the US ambassador to the IAEA, said it showed Iran's "disdain for international concerns and its rejection of international diplomacy".
IRAN'S NUCLEAR STANDOFF
A spokeswoman for EU foreign policy chief Javier Solana said Iran's move "is very much a step in the wrong direction.
"We are extremely concerned and consultations are taking place (within the EU) to co-ordinate a response," Cristina Gallach told Reuters news agency.
UK Foreign Secretary Jack Straw said Iran was "pushing its luck with the international community", adding there was "no good reason" to do what it had done if its intentions were peaceful.
Russia, which has provided Iran with nuclear know-how, urged it to stick to its international commitments.
But the BBC's Frances Harrison in Tehran says threats of economic or military sanctions against Iran - with oil prices high and US and UK forces tied down in Iraq - are not realistic.
Serious punitive action cannot be taken against Iran at the moment, she says.
Iran resumed uranium conversion, an earlier stage in the nuclear fuel cycle, at its plant in Isfahan when negotiations with the EU broke down in August.
In September, the IAEA's board called on Iran to cease all nuclear fuel work, and threatened to refer Tehran to the Security Council.
Tehran has always said it has the right under the nuclear Non-Proliferation Treaty - which it has signed - to research nuclear energy for peaceful purposes.
But Washington, Israel and many European powers distrust Iran, partly because it had kept its nuclear research secret for 18 years before it was revealed in 2002.
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