Iran defies Western pressure with missile test-firing

Ahmadinejad warned of harsh sanctions against banks and oil and gas investments

After raising the stakes in its confrontation with the West by test-firing long range missiles yesterday, Iran will be warned this week that its banks as well as its oil and gas industry will be targeted for harsh sanctions unless it complies with international demands on its nuclear programme.

In a "twin-track" approach which European governments are emphasising, Tehran will also be offered a range of incentives including access to new energy technology, closer links with the EU, and the normalisation of trade if it commits to suspending its uranium enrichment activities and coming clean on a newly revealed nuclear site.

Amid rising tensions ahead of a crucial meeting between Iran and six major powers in Geneva on Thursday, Tehran flaunted the extent of its arsenal by announcing that it had successfully test-fired advanced long-range missiles the Shahab-3 and Sajjil missiles. Both are capable of carrying warheads and can travel up to 1,200 miles, which would put Israel within range. "Iranian missiles are able to target any place that threatens Iran," said Abdollah Araqi, a high-ranking member of the Revolutionary Guards, after yesterday's news on state TV that the missile tests had gone ahead.

It was the second consecutive day of missile tests, a show of defiance following last Friday's revelation by Barack Obama that Iran had a previously undisclosed underground uranium plant near the holy city of Qom. The Foreign Office said the move "sent the wrong signal" at a time when Iran is to discuss its nuclear obligations with diplomats from the US, Britain, France, Russia, China and Germany. EU foreign policy chief Javier Solana said the tests were a cause for concern. The newly revealed nuclear site placed Thursday's talks "in a new context", he said.

Thursday will see the first direct talks with Iran attended by the US since Mr Obama came to power, and while this fulfils his offer of engagement, his administration is also attempting to widen support for hard-hitting and effective sanctions. Faced with German and French reluctance to embrace an embargo on shipments of refined oil to Iran, which both countries fear would hit ordinary Iranians worse than the regime's leaders and thus risk stoking Iranian nationalism, Washington is believed to be focusing for the moment on punitive measures that would extend the list of Iranian banks targeted by an existing blacklist while also barring oil and gas investments by foreign companies.

But diplomatic sources also said that an offer first presented to Tehran in June of last year would be renewed at the Geneva talks. This outlined eight sectors for which Iran could expect to receive outside support including its civilian nuclear energy programme, its civil aviation fleet, currently ailing under the weight of sanctions, the environment, agriculture and regional security. "The Iranians know we have a double track and they know that as a group we are solid both on the need to engage and the need to apply pressure," one European diplomat said.

Iran has said it will allow IAEA inspections of the newly revealed nuclear plant, but few anticipate an early agreement on the timing. Reza Molavi, director at the Centre for Iranian Studies at Durham University, forecast that Iran would "play on the grey area of the law" by insisting that it was in compliance with the minimum requirements of the UN's nuclear energy agency. But he stressed that the West must not fall into the trap of creating the kind of crisis the President Mahmoud Ahmadinejad needs to shore up his own legitimacy.

"We in the West forget that this governing elite, particularly Ahmadinejad, thrives on external threats and on chaos," he said. "When there isn't any external pressure he does everything in his power to create it. The best strategy is to engage him and nail him down to some kind of memorandum."