The announcement Iran had finally resumed uranium conversion activities at its plant in the central city of Isfahan drew expressions of grave concern from the European Union and stark warnings from arch-foe the United States.

"Iran has resumed the conversion of uranium under the supervision of the International Atomic Energy Agency," declared the vice-president of Iran's Atomic Energy Agency Mohammad Saidi.

Amid scenes of great excitement, an AFP correspondent saw technicians in protective clothing opening a first barrel of raw mined uranium for conversion, while International Atomic Energy Agency (IAEA) inspectors installed security cameras to monitor the process.

The European Union, which warned the move could spell the end of months of already tortuous talks, has called for an emergency meeting Tuesday of the IAEA board during which an ultimatum to suspend nuclear fuel work is expected.

The meeting is the first step in a process that could see Iran referred to the Security Council -- a US demand that the Europeans hoped their talks would avoid -- and face punishing sanctions.

However Iranian officials emphasised they were not worried about Security Council action, saying the Islamic republic's right to the nuclear fuel cycle is enshrined in the Nuclear Non-Proliferation Treaty (NPT).

"The decision is irreversible even if the board decides tomorrow to send the Iran dossier to the Security Council because (the international demand for a suspension) has no legal basis and is contrary to the NPT," Saidi told journalists.

"It is a historic day. With the help of God the plant is back online today, just as the people wanted, who pushed the leaders to do this."

The nuclear programme has proved to be a rare point of unity for Iran's fractious political groups, with Islamists, reformists and those nostalgic for the imperial regime that launched the drive agreeing it is a source of pride.

At the key meeting on Tuesday, the IAEA was expected to issue Iran with a stern warning rather than immediately take it to the Security Council. "The threat (of referral) is being held for a second meeting," said one.

Iran has been under investigation for more than two years by the IAEA , which has accused it of hiding controversial nuclear work but has yet to find any proof of a weapons programme.

Conversion turns uranium ore or yellowcake into a feed gas for enriching uranium, which can be the fuel for reactors or the explosive core of atom bombs.

The United States lost no time in condemning Iran, with a State Department official describing it "unfortunate".

"We've said all along that should Iran break the seals and restart uranium enrichment at Isfahan or anywhere else, we would think an appropriate response would be a referral to the United Nations."

German Foreign Minister Joschka Fischer warned of possible "disastrous consequences," while Britain said any resumption of conversion would be a breach of previous agreements and IAEA resolutions.

French Foreign Minister Philippe Douste-Blazy called for a united response to a "grave" crisis which he said was "deliberately provoked by Iran".

The IAEA said the conversion started before testing of the monitoring equipment had been completed but the seals placed on parts of the Isfahan plant by its inspectors had so far not been broken.

The crisis comes at a pivotal time after Iran's ultra-conservative President Mahmood Ahmadinejad took office last week and fears the new leader will take a tough stance intensified when he put a fellow hardliner in charge of the dossier.

A government spokesman said Ali Larijani, a former boss of state-run media who has described giving up Iran's right to uranium enrichment for EU incentives as like swapping "a pearl for a sweet", would soon take up the post.

Larijani replaces Hassan Rowhani, the ally of moderate regime veteran Akbar Hashemi Rafsanjani, who managed to maintain dialogue with the West through thick and thin over the last two years.

Iran last week rejected an EU package of trade, technology and security incentives to abandon the nuclear fuel cycle work, with the process once again stumbling on the crucial issue of Iran's right to uranium enrichment.

Saidi said Iran had started processing uranium into a substance called uranium tetrafluoride (UF4) and would then begin turning it into the feed gas known as uranium hexafluoride (UF6) by Wednesday.

He said the production would be stocked in Iran for use when the country resumes enrichment, adding that there was never any intention of it being exported.

Tehran insists however that actual enrichment remains suspended at the underground Natanz plant and that it still wants to pursue negotiations with the Europeans.

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