The European Union agreed in principle on Tuesday to sanction some 200 Iranian people, companies and organisations, adding to measures imposed by the United States, Britain and Canada due to suspicions that Iran is trying to develop nuclear weapons.
Iran dismissed the latest raft of sanctions, saying such steps would only intensify Iranian popular support for a nuclear programme it insists is solely for peaceful purposes.
But analysts said Iran's leadership may have underestimated Western resolve and over-played its familiar hardline brand of brinkmanship, making it hard for them to reach a compromise.
The regime is very worried about a military strike. They have mishandled the issue and it is now very difficult for them to reach any kind of compromise, said a senior European diplomat in Tehran, who asked not to be named.
Also they are worried about a spread of the Arab Spring into Iran and cannot risk more economic pressure that can cause street protests, the diplomat said.
The ratcheting up of pressure on Iran follows a November 8 report by the International Atomic Energy Agency which presented intelligence suggesting Iran had worked on designing an atomic bomb and may still be secretly carrying out related research.
Iran said the report was politically motivated.
Once the EU decision is formally approved by foreign ministers on December 1, European companies will be banned from doing business with the listed firms and organisations, while individuals will be subject to asset freezes and visa bans. The news helped push benchmark Brent crude above $108.
The EU move follows a coordinated tightening of the sanctions by the United States, Britain and Canada on Monday.
The United States named Iran as an area of primary money laundering concern, a step designed to dissuade non-U.S. banks from dealing with it; blacklisted 11 entities suspected of aiding its nuclear programs; and expanded sanctions to target companies that aid its oil and petrochemical industries.
Britain banned all its financial institutions from doing business with Iran, including the Iranian central bank, and Canada said it would ban the export of all goods used in Iran's petrochemical, oil and gas industries and block virtually all transactions with Iran, also including the central bank.
The new measures would add to the cost Iranians pay for all their international trade, but would not be enough to persuade Iran's leaders to change their course.
It is going to be a complication, but I still think that the impact will be marginal, said David Butter, regional director at the Economist Intelligence Unit in London.
FRANCE PUSHING HARD
U.S. and EU sanctions passed in 2010 already stopped most Western banks dealing with Iran and pressure from Washington made it temporarily impossible for Indian oil buyers to pay for some $5 billion (3 billion pounds) of Iranian oil earlier this year.
Washington however stopped short of targeting Iran's central bank, a step that would have cut it off from the global financial system meaning it would not be able to receive payments for its oil. Cutting off crude from Iran, the world's fifth biggest exporter, would send oil prices skyrocketing and jeopardise U.S. and European economic recovery.
France meanwhile, has yet to impose its own new sanctions, but is pushing hard for a unified Western response to sanction Iran's central bank and stop imports of Iranian oil.
France believes unprecedented sanctions have to be taken to convince Iran that it makes the strategic choice of a sincere negotiation and to put into action its international obligations, French Foreign Ministry spokesman Bernard Valero told a news briefing.
While the United States stopped buying Iranian crude in the 1990s, there is less appetite elsewhere in the West for the French proposal of a wider import ban, with British sources saying London's latest measures were not meant to target oil.
Asked if France would simply halt its oil imports if a common position could not be found, Valero said: If we find ourselves alone, we'll have to see. But we won't be on our own.
The head of the National Iranian Oil Company said in any case he had no fear of losing EU markets.
Iran's crude exports to the countries that are members of the European Union are very small, Ahmed Ghalehbani said on the Iranian Oil Ministry website.
There are various countries that want Iran's oil and the Islamic Republic of Iran does not have any concerns about European countries not buying its oil, he said.
RUSSIA OPPOSES NEW SANCTIONS
The piecemeal Western adoption of unilateral sanctions reflects the difficulty of persuading Russia and China not to veto further measures at the U.N. Security Council, where they have supported four previous sanctions resolutions against Iran.
Russia issued a sharply worded statement on Tuesday underscoring its longstanding opposition to sanctions beyond those endorsed by the U.N. Security Council.
We again underline that the Russian Federation considers such extraterritorial measures unacceptable and contradictory to international law, Foreign Ministry spokesman Alexander Lukashevich said in the statement.
Such practices ... seriously complicate efforts for constructive dialogue with Tehran, Lukashevich said.
Russia has significant commercial ties with Iran. Analysts say Moscow sees less risk than the West of Tehran acquiring nuclear weapons in the forseeable future, and uses its ties with Iran as a lever in relations with the United States.
While there has been increased media talk of a possible Israeli or U.S. military strike on Iran in response to its nuclear programme, lacking conclusive evidence that the Islamic Republic is indeed building an atomic bomb, Western states are likely to stick to diplomacy and economic measures.
The route that continues to be taken and favoured by the international community when dealing with Iran is very much one of applying pressure and a desire to return to the negotiating table, said Marie Bos, Middle East analyst for Control Risks Group, a consultancy firm.
We still feel at this stage that the scenario of a military strike remains an unlikely one.
(Writing by Jon Hemming)