Iran announced a nuclear fuel breakthrough and test-fired a new radar-evading medium-range missile in the Gulf on Sunday, moves that could further antagonise the West at a time when Tehran is trying to avert harsh new sanctions on its oil industry.
U.S. President Barack Obama signed a law on Saturday imposing tougher financial sanctions to penalise Iran for a nuclear research programme that the West suspects is aimed at developing nuclear weapons.
The move could for the first time hurt Tehran's oil exports, and the European Union is due to consider similar steps soon.
As tensions have risen, Iran threatened last week to close the Strait of Hormuz, a narrow Gulf shipping lane through which 40 percent of world oil flows, if sanctions hit its oil exports.
At the same time, it signalled on Saturday that it was ready to resume stalled international talks on its nuclear programme.
It says the programme is completely peaceful and, in what Iranian media described as an engineering breakthrough, state television said Iran had successfully produced and tested its own uranium fuel rods for use in its nuclear power plants.
The rods were made in Iran and inserted into the core of Tehran's nuclear research reactor, the television reported.
Iran is trying to develop its own nuclear fuel cycle to power reactors without international help. Western countries are sceptical of some of Tehran's engineering claims but say they fear Iran's enrichment of uranium to make fuel could eventually lead to it producing a weapon.
In what has become part of a pattern of sabre-rattling in recent weeks, Iran is finishing a 10-day Gulf naval exercise.
Deputy Navy Commander Mahmoud Mousavi told IRNA state news agency it had successfully test fired a medium-range surface-to-air missile equipped with the latest sophisticated anti-radar technologies.
Iran has apparently delayed pre-announced plans to test its long-range missiles during the drill, saying the weapons would be launched in the next few days. Its long-range missiles could hit Israel or U.S. bases in the Middle East.
The United States and Israel say they have not ruled out military action against Iran if diplomacy fails to resolve the dispute over its nuclear programme.
Western analysts say Iran sometimes exaggerates its nuclear advances to try to gain leverage in its stand-off with the West.
The U.N. Security Council has already imposed four rounds of global sanctions on Iran, but Russia and China have refused to back sanctions that would seriously affect Iran's oil industry, so the EU and United States have taken measures on their own.
Just how far the latest U.S. measures will go could depend on how Obama decides to implement them.
The U.S. defence funding bill, approved by Congress last week, aims to reduce the oil revenues that make up the bulk of Iran's export earnings. Obama signed it in Hawaii on Saturday, where he was spending the Christmas holiday.
If enforced strictly, the sanctions could make it nearly impossible for most refiners to buy crude from Iran, the world's fourth biggest producer.
However, Obama asked for scope to apply the measures flexibly, and will have discretion to waive penalties. Senior U.S. officials said Washington was consulting foreign partners to ensure the new measures did not harm global energy markets.
Despite its missile tests, war games and threats to close the Hormuz Strait, Iran has also made conciliatory gestures, saying it wants to resume talks with major powers, stalled for a year, about its nuclear research programme.
Western officials suggest the offer may be a stalling tactic to avert sanctions and buy time for more nuclear progress.
Iranian media reported on Saturday that nuclear negotiator Saeed Jalili would write to the EU foreign policy chief to say Iran was ready for talks.
A senior Western diplomat in Tehran, who asked not to be identified, said the stepped-up Iranian threats show that they are worried about losing petrodollars, on which more than 60 percent of the economy depends.
The rising tensions are having an impact at home. Iran's currency has nosedived in recent weeks as ordinary Iranians have moved money from savings accounts into gold or foreign currency.
The price of staple foods has increased by up to 40 percent in recent months and many critics have put the blame on increasing isolation brought about by President Mahmoud Ahmadinejad's economic and foreign policies.
(Writing by Peter Graff; Editing by Kevin Liffey)