The drumbeat for a new military confrontation in the Middle East is growing more insistent. Iranian state television yesterday screened images of the military test-firing of a Shahab-3 rocket, a missile reportedly capable of striking Israeli territory. This follows a "rehearsal" last month of a bombing run on Iranian nuclear enrichment facilities by Israeli fighter planes.

Meanwhile, in Washington, despite the publication of a US intelligence report last year arguing that Iran has abandoned its nuclear weapons programme, some of the wilder voices in the American administration are demanding that President Bush give the green light to an Israeli military operation before he leaves office.

The Iranian government's decision to persist with its uranium enrichment programme, in contravention of a United Nations Security Council resolution, can certainly not be ignored by the world. Iran has the right to develop civilian nuclear power, it is true, but the long concealment of its uranium enrichment programme from the International Atomic Energy Agency (IAEA) (in breach of its obligations as a signatory of the Nuclear Non-Proliferation Treaty) means that it has lost the benefit of the doubt. While Iran refuses to co-operate with inspectors from the IAEA, sanctions are an appropriate response.

But the rest of the world must also be careful not to inflame the situation through loose threats directed towards Tehran. For this would merely give hardliners within the Iranian regime exactly what they want.

It is important to bear in mind that the nuclear stand-off is intimately connected to the struggle for power within Iran. There are signs that Iran's President, Mahmoud Ahmadinejad, could be set to lose power in next year's elections. One does not have to look too hard to discover why. Despite Iran's record oil revenues, unemployment is painfully high. Inflation is close to 30 per cent and there is widespread disaffection over official corruption.

Mr Ahmadinejad, a former mayor of Tehran, was elected in 2005 on a populist ticket of sorting out such problems. He has conspicuously failed to do so and popular opposition to him has been steadily growing as a result. Yet the nuclear issue has been the President's saving grace in recent years. By behaving provocatively towards the West and drawing threats to Iran's sovereignty in response, Mr Ahmadinejad has been able to wrap himself in patriotic clothes and bolster his domestic position. He will most probably attempt to repeat this trick between now and the elections. The outside world should not rise to the bait.

Another incentive for the West to tread carefully is that Mr Ahmadinejad now has a credible presidential challenger. Earlier this year, Ali Larijani was elected speaker in the Iranian parliament, a considerable power base in Iranian politics. The former chief nuclear negotiator is certainly no liberal reformer. And the grey eminence in Iran, Ayatollah Khamenei, is understood to support the government's present defiant nuclear policy. But Mr Larijani was reportedly fired from his diplomatic post by Mr Ahmadinjad because he wanted to pursue a more pragmatic approach on the enrichment issue. These are signs that a deal will become possible if the West plays its diplomatic hand smartly.

The hawks in Israel and Washington need to be restrained. The programme of incentives from the European Union, unveiled last month and designed to help Iran develop civilian nuclear power, is much more likely to undermine the threat posed by Tehran than sabre-rattling. As bleak as the situation looks, Iran can still be brought in from the cold.