The report assesses Tehran's compliance with UN demands to stop enrichment activities among other things by a Friday deadline set by the council on March 29 in a non-binding statement.

"Our expectation would be that assuming no change of direction by Iran and there's no reason to think there will be a change of direction, we'll look at a 'Chapter 7' resolution to make mandatory all the existing IAEA resolutions," Bolton said.

Chapter 7 of the UN Charter, which is invoked in case of threats to international peace and security, can open the door to sanctions or even military action.

"We will be consulting this week on the nature of the language (of the draft)," Bolton said.

US Undersecretary of State for Political Affairs, Nicholas Burns, said Friday that Britain and France were expected to present the Chapter 7 draft next week.

But China's UN envoy Wang Guangya, the president of the council for April, warned Monday:"I don't think it (a Chapter 7 resolution) will be a productive move."

Iran's hardline President Mahmoud Ahmadinejad on Monday rejected Security Council demands that Tehran take concrete steps to allay Western suspicions that it is seeking a nuclear weapons capability, and warned that the Islamic republic could quit the Non-Proliferation Treaty (NPT).

He also confidently dismissed any threat of sanctions or even a US military attack.

Commenting on Iran's assertions that sanctions were unlikely because of opposition from Russia and China, two veto-wielding permanent members of the council that have close ties with Tehran, Bolton said: "I don't know what the Security Council is going to do.

"I said repeatedly I think this is a test for the Security Council and we're going to take it step-by-step," Bolton said.

"The first step will be a Chapter 7 resolution."

But some diplomats said there was no certainty that the Council would hold a formal meeting on the issue this week.

US officials have said the political directors of the council's five permanent members -- Britain, China, France, Russia and the United States -- were likely to meet in Paris some time next week to thrash out a common strategy.

In addition Wang spoke of "proposals that the IAEA board of directors should have a meeting first before the council takes up the action."

Iran insists that its nuclear program is peaceful and that it only wants to enrich uranium to make reactor fuel to generate electricity, as is allowed by the NPT -- the cornerstone of efforts to avert the spread of nuclear weapons.

Washington has meanwhile not ruled out taking military action against Iran if diplomacy fails.

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