US diplomats were already preparing a proposal for graduated sanctions against Iran when the UN nuclear watchdog confirmed that, as expected, Tehran had not suspended its uranium enrichment program as demanded by a UN Security Council resolution.

"It is time for Iran to make a choice," Bush said in a speech to a US veterans group as the UN deadline ticked by.

"We've made our choice. We will continue to work closely with our allies to plan a diplomatic solution, but there must be consequences for Iran's defiance and we must not allow Iran to develop a nuclear weapon," he said.

Bush was speaking as the International Atomic Energy Agency (IAEA) released its report in Vienna confirming that "Iran has not suspended its enrichment related activities".

The conclusion was expected since Iranian President Mahmoud Ahmadinejad had defiantly declared hours earlier that his government would not back down "an inch" in the nuclear standoff.

Iran insists its uranium enrichment effort is designed only to produce fuel for civilian nuclear power plants, an activity allowed under the nuclear non-proliferation treaty of which Tehran is a signatory.

And a senior official close to the IAEA said UN inspectors had found no "concrete proof" that Iran's nuclear program was of a military nature.

But Washington and its allies still lost no time in moving toward sanctions with senior diplomats from the five permanent Security Council members plus Germany planning to meet next Thursday in Berlin to outline the exact steps to take against Iran, the US State Department said.

Britain, China, France, Germany, Russia and the United States will meet a day after talks in Berlin between Iran's top nuclear negotiator, Ali Larijani, and EU foreign policy chief Javier Solana, who has been acting as a mediator in the dispute.

State Department spokesman Sean McCormack flatly ruled out even indirect talks between representatives of the six major powers and the Iranian envoy in Berlin.

But he said that both before and after the Berlin talks he expected "there will be diplomatic contacts with the Iranians to encourage them to take the offer that has been made to them and to comply with the just demands of the international community."

Undersecretary of State Nicholas Burns, the third-ranking US diplomat, who will represent Washington in Berlin, said he expects the Security Council to adopt a sanctions plan within a month.

US officials have said the sanctions would be gradual, beginning with relatively symbolic steps like bans on travel by Iranian nuclear officials, then building to more substantial measures.

While Washington has declined to detail its sanctions plan in public, the New York Times on Thursday quoted senior officials saying the United States, Britain, France and Germany had been working on a three-tier menu of punishments.

The list would begin with low-impact measures including an embargo on the sale of nuclear-related materials, a freeze of overseas assets and a travel ban for some Iranian officials, said officials involved with the talks.

If that failed to persuade Iran, the measures a few weeks later would progress to a broader travel ban and freezing assets of Iranian government members, it said.

Should Tehran continue to resist compliance, the sanctions would be ratcheted up to include restrictions on commercial flights and efforts to get international banks and financial institutions to stop lending to Iran.

It remained unclear Thursday whether the US-European plan would gain the backing of China and Russia, who both have extensive economic ties with Iran and traditionally oppose the use of sanctions as a diplomatic tool.

US officials have said Secretary of State Condoleezza Rice had obtained assurances that Moscow at least would be on board for the initial sanctions, and Burns expressed confidence the coalition would hold.

"The Iranians have not been able to separate us from the Europeans or from Russia and China," he said late Wednesday. "I think this coalition will stick together."

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