US Defense Secretary Donald Rumsfeld also said that the United States had no plans to attack the Islamic republic but he warned that US forces would take action to stop Iranian forces infiltrating Iraq.

Amid mounting tensions over the nuclear standoff, White House spokesman Scott McClellan said the United States still wants a diplomatic solution to the nuclear dispute.

"We are pursuing a diplomatic resolution to the nuclear issue when it comes to Iran," McClellan told reporters.

"The first step in the Security Council will not be looking at sanctions, it will be looking at the possibility of a strong presidential statement laying out very clearly for the regime what it needs to do and calling on the regime to take certain steps."

US officials have said they expect the UN Security Council to start debating Iran next week, after a report by the International Atomic Energy Agency (IAEA) was referred to the world body.

Washington has already laid out a strategy which would take gradual steps toward sanctions, in a bid to get greater international support for any UN action taken.

Secretary of State Rice said Iran had become a key threat to world peace as she sought Congress backing for a package to promote democracy in the Islamic republic.

"We may face no greater challenge from a single country than from Iran, whose policies are directed at developing a Middle East that would be 180 degrees different than the Middle East we would like to see develop," Rice told a congressional hearing.

"This is a country that is determined, it seems, to develop a nuclear weapon in defiance of the international community that is determined that they should not get one."

Rice, who testified along with Rumsfeld, renewed accusations that Tehran was "the central banker for terrorism".

"The challenge of Iran has become more acute as it has become clear that (...) the Iranians have become ever more defiant," she said.

Her comments came as Iran's hardline regime vowed not to abandon its nuclear programme, which it insists is for peaceful purposes, and even made veiled threats to Washington. The United States is "susceptible to harm and pain," Javad Vaidi, head of the Iranian delegation at the IAEA, said Wednesday.

Rice told the Senate committee that the 75 million dollars being sought by the administration would be used to help non-governmental organizations and to reach the Iranian people through broadcasts, the Internet and cultural programs.

Rumsfeld meanwhile told lawmakers that US forces would take action against alleged Iranian infiltrations into Iraq.

He charged that Iran is sending people into Iraq to do "damaging and dangerous" things to US forces and warned that "our forces will certainly take the appropriate steps to stop them."

General Peter Pace, chairman of the Joint Chiefs of Staff, said that US forces will treat any Iranian forces that fight them inside Iraq as enemy forces.

Iran has consistently dismissed US concerns about its nuclear program and on Thursday, the country's supreme leader Ayatollah Ali Khamenei vowed that Iran would continue with its nuclear drive despite looming UN Security Council action.

"Today, the Iranian people and the officials of the Islamic republic of Iran, more powerful than before and like steel, will stand against any pressure or conspiracy," a defiant Khamenei said.

He added that Iran had no plans to drop its nuclear program and urged Iranians to brace for "possible pain and trouble".

The IAEA on Wednesday opened the way for Security Council action against Iran, which, despite its denials, is suspected of seeking to develop nuclear weapons under the cover of a civilian program.

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