Iran has switched on a uranium enrichment plant inside a mountain and sentenced an American to death for spying, actions sure to provoke Western anger and undermine diplomacy aimed at averting further sanctions or war.
The start of enrichment at the Fordow bunker near the Shi'ite Muslim holy city of Qom was confirmed on Monday by an Iranian official in Tehran and by the Vienna-based International Atomic Energy Agency, which has inspected it.
Iran insists its nuclear programme is purely non-military but the West believes it is intended to produce nuclear weapons.
Putting enrichment deep underground could eventually make it much harder for U.S. or Israeli forces to bomb, narrowing the time window for diplomacy to avert any potential attack.
The U.S. State Department said the reported uranium enrichment at Fordow would be a further escalation of Iran's ongoing violations of U.N. resolutions.
The death sentence for Amir Mirza Hekmati, 28, an Arizona-born former U.S. military translator with dual nationality, further riled Washington, which denies he is a spy and has demanded his immediate release since his arrest.
If true, we strongly condemn such a verdict and will work with our partners to convey our condemnation to the Iranian government, White House spokesman Tommy Vietor said.
The two moves come at a time when new U.S. sanctions imposed over Iran's nuclear programme are causing real economic pain. Tehran has responded with threats to international shipping that have frightened oil markets. A parliamentary election in two months is widening Iran's internal political divisions.
On New Year's Eve, U.S. President Barack Obama signed into law by far the toughest financial sanctions yet against Iran, which if fully implemented could make it impossible for most countries to pay for Iranian oil. The European Union, which still buys a fifth of Iran's 2.6 million barrels per day of exports, is expected to announce an embargo this month.
Nuclear talks collapsed a year ago between Iran and the five permanent U.N. Security Council members plus Germany (P5+1). Efforts to restart them have foundered over Iran's refusal to negotiate over its right to enrich uranium.
The United States and Israel say they are leaving the military option on the table in case it becomes the only way to prevent Iran from making a nuclear weapon.
Hekmati's case is thought to be the first in which Tehran has passed a death sentence on a U.S. citizen for spying. His family says he was arrested last August while visiting grandparents in Iran.
Iran has aired a televised confession - denounced by Washington - in which Hekmati said he worked for a New York-based video company designing games to manipulate public opinion in the Middle East on behalf of U.S. intelligence.
Amir Mirza Hekmati was sentenced to death ... for cooperating with the hostile country America and spying for the CIA (Central Intelligence Agency), ISNA news agency quoted judiciary spokesman Gholamhossein Mohseni-Ejei as saying.
The court found him Corrupt on the Earth and Mohareb (one who wages war on God).
The United States urged Iran to grant Hekmati access to legal counsel and release him without delay.
Allegations that Mr Hekmati either worked for, or was sent to Iran by the CIA are false, Vietor said.
The Iranian regime has a history of falsely accusing people of being spies, of eliciting forced confessions, and of holding innocent Americans for political reasons.
Hekmati's execution could still be blocked by Iran's highest court, which must confirm all death sentences. Iran could hold on to Hekmati and use him - as they have with previous foreign detainees - as a pawn in their rivalry with the United States, said Gala Riani, analyst at forecasting firm IHS Global Insight.
Three U.S. backpackers jailed in Iran as spies in 2009 were freed in 2010 and 2011 in what President Mahmoud Ahmadinejad called a humanitarian gesture. An Iranian-American sentenced to eight years for spying in 2009 was freed after 100 days.
A spokesman for Mott Community College in Flint, Michigan, where Hekmati's father works, said the family would not be commenting because it's a very tricky diplomatic situation.
Hekmati had worked as a U.S. military translator. Iran's Farsi language is one of the two main tongues spoken in Afghanistan, and the U.S. military often deploys Americans of Iranian origin there as translators.
Tehran says it is refining uranium to 20 percent purity to fuel a peaceful medical research reactor, and that it has hidden nothing from the IAEA.
All nuclear activities, including enrichment in Natanz and Fordow, are under continuous surveillance and control and safeguards of the IAEA, Iran's envoy to the IAEA, Ali Asghar Soltanieh, told Reuters in Vienna.
An IAEA spokeswoman confirmed the start of enrichment at Fordow. All nuclear material in the facility remains under the Agency's containment and surveillance, she said.
The West says uranium of 20 percent purity is not necessary for power plants and would be a big step towards the higher purity needed for a nuclear bomb. Western officials say Iran lacks the technology to use it in a medical research reactor.
Iran disclosed to the IAEA in 2009 that it was building the facility beneath a mountain at Fordow, but only after learning that it had been detected by Western intelligence.
All of Iran's enrichment activity is in violation of (United Nations) Security Council resolutions and any expansion of its capacity at Fordow just compounds those violations, said a Western diplomat in Vienna.
In a case apparently separate from Hekmati's, Iran said on Monday it had broken up a U.S.-linked spy network planning to fuel unrest ahead of a parliamentary election in March.
The detained spies were in contact with foreign countries through cyberspace, Intelligence Minister Haydar Moslehi was quoted by state television as saying. He gave no information about the nationalities or the number of those detained.
The parliamentary election will be Iran's first since a 2009 presidential vote whose disputed result triggered eight months of unrest which Iran's rulers put down by force.
After years in which economic sanctions had little effect, the latest measures are causing real pain.
Oil buyers are demanding deep discounts from Iran, cutting the revenue it needs to feed its 74 million people. The rial currency has plunged and Iranians have scrambled to withdraw savings from banks to buy dollars.
Iran has remained defiant. In a televised speech on Monday, Supreme Leader Ayatollah Ali Khamenei said: Sanctions imposed on Iran by our enemies will not have any impact on our nation.
The Iranian nation believes in its rulers.
Iran has responded to the new sanctions by threatening to shut the Strait of Hormuz, the outlet for ships carrying oil from the Gulf, guarded by a huge U.S.-led international fleet.
Brent Crude was trading at around $112 a barrel on Monday, up by about $5 in the nine days since Obama signed the new sanctions into law. Iran's military threats and sanctions news have caused spikes in the price in recent weeks.
The U.S. sanctions law allows Obama to issue temporary waivers to firms buying Iranian oil to prevent havoc on energy markets, but countries are meant to show they are cutting back purchases from Tehran to receive permits. Saudi Arabia has promised to make up any shortfall in global supplies.
European countries withdrew their ambassadors after protesters stormed the British embassy in Tehran in November. France said on Monday its ambassador had returned.
A Western envoy in Vienna said Iran was unlikely to change course. They calculate that giving in to the West, or being seen to give in to the West, is more expensive than maintaining the current course, the diplomat said.
As always they are playing for time.
(Additional reporting by Hossein Jaseb, Mitra Amiri and Ramin Mostafavi in Tehran, Christopher Wilson and Caren Bohan in Washington and Regan Doherty in Qatar; Writing by Peter Graff; Editing by Andrew Roche)