The country confirmed last night that it would resume uranium conversion at its Isfahan facility. Iranian officials said the unilateral move is in retaliation for Britain, France and Germany failing to submit a package of guarantees before an Iranian deadline of lunchtime yesterday.
The Foreign Office urged Iran to back away from its threat to resume the uranium-related activities, which would breach an agreement reached with the three countries - known as the E3 - in November last year.
A Foreign Office statement said that such a unilateral move would be "unnecessary and damaging".
The negotiations between Iran and the Europeans have stumbled from crisis to crisis since Tehran agreed to suspend its uranium-related activities to reassure the West that it is not bent on developing nuclear weapons. The US and Israel are convinced that Tehran is using the cover of a civilian programme to produce a nuclear bomb - which the Iranians deny.
A senior official involved in the negotiations said last night that this time, the crisis was "more serious" than in the past, because it comes days before the inauguration of Iran's new hardline President, Mahmoud Ahmadinejad, on Wednesday.
Diplomats believe the Iranian authorities want to decide on the future of their talks with the Europeans before Mr Ahmadinejad is sworn in next Saturday, so that any radical policy change would be seen as having been approved by the outgoing president, Mohammed Khatami.
In recent weeks, Iranian officials have made it clear that they are becoming impatient with the negotiations dragging on, even as the Europeans prepared to deliver their proposals on security and economic guarantees for Iran.
It is understood that the E3 has been preparing formally to issue a commitment not to use force against Iran, to consider Iran a chief source of energy for Europe and to support Iran's membership in the World Trade Organisation.
Iran's chief negotiator, Hasan Rowhani, said in a letter to President Khatami, released yesterday, that the E3 had been discussing "guarantees about Iran's integrity, independence, national sovereignty" and "non- aggression toward Iran".
But Tehran announced the Sunday deadline after receiving indications from the Europeans that they would submit their formal proposals before the end of this week - setting the scene for a showdown.
The E3 has made no secret of the fact that if Iran were to breach the Paris agreement of November 2004, it would break off the negotiation process. The E3 would also report back to the International Atomic Energy Agency where the Americans have been pressing for a referral to the Security Council. It will also jeopardise its future prospects of economic cooperation with the West.
The IAEA still has questions about Iran's nuclear activities. The Europeans feel they must have objective guarantees about Iran's intentions because Tehran deceived the UN nuclear watchdog about its nuclear programme for 18 years.
Until now, the E3 has held back from recommending referring Iran to the Security Council because of a lack of consensus on the 15-member body.But Iran may feel it has enough allies on the council to block a censure.