Iran declared earlier this week that the European Union was no longer qualified to hold talks on Iran's nuclear program which highlighted the diplomatic dilemma between EU and Iran.
On one hand, the EU needs to criticize the disputed presidential election and subsequent crackdown on demonstrators, while the other, it is urgent for the bloc to hold talks with Iran on its nuclear program.
EU foreign ministers last week urged Iran to release the nine Iranian employees of Britain's Tehran embassy and a Greek journalist detained as alleged instigators of street protests over disputed presidential election results.
At a meeting in Brussels Friday the 27 EU states agreed to take a gradual approach toward Tehran that could in future include visa bans and withdrawal of EU ambassadors from Iran, depending on how the situation evolved, an EU official said.
They warned of a strong and collective response against intimidation of diplomatic staff.
The UK and other EU states are hoping the bloc will stage a co-ordinate protest against the detentions this weekend, with a possible time-limited withdrawal of the bloc's ambassadors.
It is clear we need to show solidarity, that we are unified, Swedish Prime Minister Fredrik Reinfeldt, whose country holds the EU presidency, told a news conference with French President Nicolas Sarkozy.
Sarkozy said EU states would do all they could to back Britain. France has always wanted to strengthen the sanctions so that the Iranian leaders really understand that the path they have chosen will be a dead end, he said. Now it is up to the British to tell us what they need.
But some EU governments fear a withdrawal of ambassadors, even if temporary, could play into the hands of regime hardliners who want to re-establish their authority at home by underscoring the sense that Iran is a proud nation isolated from the outside world.
There are concerns in Europe that if the EU takes a tough stance towards Iran in the next few months it may deter any chance of making progress in negotiations on Iran's nuclear program, which remains the core issue of policy.
Europe and the US have also been seeking greater co-operation from Tehran in efforts to stabilize Afghanistan and Iraq, and more constructive engagement on other Middle Eastern crises.
In Europe, meanwhile, governments have to consider whether to recognize the administration of Mr. Ahmadi-Nejad, which the reformist opposition has declared illegitimate.
One issue being debated by UK diplomats is whether Britain should attend the formal inauguration of President Mahmoud Ahmadi-Nejad as the country's president either later this month or in August.
Some EU diplomats take the view that the US and EU now have no option but to act more firmly.
We can't go back to business as usual, said one. There are some things we urgently want to discuss such as the nuclear file. But it has to be in our interests now, not Iran's.
Fredrik Reinfeld, the Swedish prime minister, who now has served as the EU presidency said on Wednesday that Europe wants to support those standing up for democracy in Iran.
But he added: We must ask ourselves the question: how can we support this and at the same time not ... polarize Iran from the rest of the world ... That's the balance we need to strike.