Iran: Rich, armed and angry, how dangerous is it to the world?

The President wants Israel exterminated, defies international outrage and may soon have nuclear weapons. Angus McDowall in Tehran, Raymond Whitaker and Marie Woolf assess the true Iranian threat

The statement by Iran's hardline new President, Mahmoud Ahmadinejad, was roundly condemned by the UN Security Council, and appeared to bring the possibility of sanctions closer. Mr Ahmadinejad, however, was undaunted, joining hundreds of thousands of demonstrators in Tehran to chant " Death to Israel!" and "Death to America!" It did not appear to concern him that this reinforced the image of a dangerous regime which might not shrink from using nuclear weapons once it had acquired them.

Yet Iran is a complicated and confusing country, as visitors to Tehran soon become aware. The stern, black-browed visage of Ayatollah Khomeini, the deceased revolutionary leader, glowers down from huge murals all over the capital, but in the streets below, fashion-conscious girls in tight jeans and heavy make-up trip past. Other murals proclaim official hostility to America, the "Great Satan", but the capital's youth are well up with trends in American movies and R&B music. Even though it is Ramadan, when the entire populace should be fasting from dawn to dusk, it is common to see people eating or smoking in cars or discreet corners of city parks.

And when you look more closely at the political rhetoric, the picture is also less monolithic than at first glance. Although President Ahmadinejad's call to erase Israel from the map was a direct quotation of Ayatollah Khomeini, it is years since such an inflammatory statement was made by anyone so senior in Iran, and other figures quickly uttered more soothing words. All the President was seeking to do, they said, was to draw attention to the world's failure to implement UN resolutions condemning Israel's treatment of the Palestinians.

But for many in the West, these reassurances sound too similar to those about Iran's nuclear ambitions. For years the regime has insisted that its programme is aimed purely at developing civil nuclear power, despite the fact that it is one of the world's leading oil exporters and has more natural gas reserves than any country apart from Russia. It has been less than frank with the International Atomic Energy Agency, the UN's nuclear watchdog, and has reacted belligerently under pressure. With the stakes so high, the President's aggressive language on Israel could not be allowed to pass unchallenged.

Among those most clearly toughening their stance was Tony Blair, who warned that the Tehran regime would not be allowed to become a "threat to world security". Speaking at a one-day European summit at Hampton Court in London, the Prime Minister said he felt a "real sense of revulsion" at President Ahmadinejad's remarks.

"These sentiments are completely and totally unacceptable," Mr Blair went on. "I have never come across a situation where the president of a country says they want to wipe out another country ­ this is not acceptable. Their attitude towards terrorism, towards nuclear weapons and towards Israel is not acceptable."

Iran would be making "a very big mistake", said Mr Blair, if it believed Western leaders were too preoccupied with other issues to deliver a strong response. But was President Ahmadinejad actually speaking for Iran? For all his braggadoccio, the extent of his influence over foreign and security policy is debatable. That in turn, however, raises the question of who really does have power in Tehran. There is no doubt that the answer matters. As Friday's chanting and flag-burning showed, Iranian hardliners feel they are riding the crest of a wave. Spurred by their success in the summer's elections, fuelled by record oil revenues and buoyed by the failure of the US occupation in Iraq, they have become emboldened. When the US invaded Iraq in 2003, it looked ready to roll on and tackle Iran. That is now out of the question. Iraq's new government is composed of old Iranian allies among the Shia and Kurdish parties. And the US military is bogged down in a guerrilla war that has left it overstretched and vulnerable. Iraq's instability has also gifted Iran another huge advantage in rising oil prices.

Until recently, Iran was thought to be shifting towards a more conciliatory approach. With half the population under 30 and apparently less interested in politics than in jobs and having fun, the government was expected to become more accommodating. Iran started to open up, allowing pop music and foreign films at home and offering a "dialogue of the civilisations" abroad. Now the older post-revolutionary slogans are being shouted again, calling down death to the enemy and eternal life for revolutionary martyrs.

From one perspective, Iran is a country dominated by a small clique of hardline revolutionaries who keep the young population disenfranchised by manipulating a false democracy. In another, the Islamic republic has been granted legitimacy by its people, who regularly turn out to vote in large numbers, and ensure that enough interest groups are represented in decision-making to give balance to the state.

At the very top, the system is opaque. The Supreme Leader, Ayatollah Ali Khamenei, holds ultimate authority. He inherited the role from the charismatic Ayatollah Khomeini on the latter's death in 1989. Under Iran's system of Vilayat-e Faqih ­ rule of the jurisprudent ­ power is vested in the clergy because they can best interpret God's intentions for mankind.

Under the Supreme Leader is the elected government ­ the President with his cabinet, and the Majlis, as the parliament is known. Arch-conservatives took control of the Majlis in February 2004 after an election many Iranians thought was rigged by the banning of reformist candidates. Mr Ahmadinejad then won the presidential election this summer, promising to improve conditions for Iran's poor by better sharing the $37bn (£21bn) of oil revenues earned last year.

But a series of other groups have a stake in the process too. The Islamic Revolutionary Guards Corps has grown in power in recent years, and many Iranians believe it controls most of the voices around the Supreme Leader, to whom it expresses total devotion. Mr Ahmadinejad is a former guardsman, as are many of the new Majlis deputies.

The force, 150,000 strong, receives all the best military equipment, and has started to play a significant role in Iran's economy, bidding to take over big oil engineering projects. It is also in charge of the Islamic Basij militia, formed during the 1980-88 war with Iraq as a volunteer unit comprising young boys and old men who wanted to seek martyrdom for the revolution. It was block voting by the millions of Basij members that ensured Mr Ahmadinejad's June election victory.

With his arrival in office the right-wing allies of the guards corps seemed to have taken power completely. For the first time since the Islamic revolution in 1979, all the branches of power were being run by a single political faction. But Ayatollah Khamenei has since moved to restore some political equilibrium to the process of rule. Last month he increased the power of the Expediency Council, headed by defeated presidential candidate (and former president) Ali Akbar Hashemi Rafsanjani, giving it new authority over the other branches of power.

"More senior hardliners are now saying to the President: Look around you," said a Tehran-based political analyst. "Your economic team has achieved nothing and your foreign policy is a mess. It's time to get serious."

Despite appearances, foreign policy works by consensus too. It is made by the leader and the Supreme National Security Council, a body that includes many senior officials, including the President. It ensures that all the big decisions ­ on the nuclear issue, Iraq and relations with the West ­ are agreed on by all the people at the top.

For most of these influential figures, staying in power is the most important goal ­ a goal that is inimical to any sort of direct attack on Israel. In all probability, the naive outbursts of Mr Ahmadinejad were as much of an embarrassment and irritation to them as his self-image as a blacksmith's son who speaks for the people. They would do well not to treat him altogether as someone who can safely be ignored, however. He is far more representative of popular feeling than the urban sophisticates of Tehran.

In his election campaign, Mr Ahmadinejad used to full advantage the paradox that oil has always been a mixed blessing. Many Iranians feel aggrieved that despite the fortune flowing into the country, little seems to trickle down to them. They often accuse their leaders of siphoning off petrodollars to line their own pockets rather than investing to help the poor. In fact, most of the money goes on badly managed subsidy and state employment programmes.

For the government, the billions of dollars flowing into the country allow them to buy off the public with short-term spending programmes ­ and leave plenty left over for other projects like arms spending and the nuclear programme. Iran's enormous natural gas reserves have also come into play. China and India are both hungry for Iranian gas deals, but it is uncertain how far they are willing to offer any strategic alliance in return. Last month India voted against Iran on the nuclear issue, accepting that its new alliance with the US is more important. However, talks for a multibillion-dollar gas pipeline through Pakistan continue.

With Iran's conservatives on such a high, many people expected them to make more thorough changes. But so far, they seem to be more interested in cosmetics than fundamentals. The tone has been more religious at home and more stridently nationalist abroad. They have attacked foreign investment programmes initiated by the reformists and Mr Rafsanjani's technocrats, and have changed the cultural mood by barring most foreign films from television and cinemas.

"There used to be a pretty flexible line between the people and the government, but now it is completely rigid," said Ali, a middle-aged government employee in a mainstream suburb of Tehran. "I don't feel as though the government pays us any attention at all any more."

Ultimately, the hardliners know their electoral base is insecure. Only about half of Mr Ahmadinejad's votes came from the conservative core. The rest were people who responded to his traditional image and his pledges to eradicate poverty and corruption. Most Iranians may not feel particularly worked up about the need for new freedoms, but judging by the mood on the street they would react angrily if many of those achieved by the reformists were revoked.

More than anything else, they are focused on their own opportunities and standard of living ­ things that can be improved in the short term by spending oil income, but in the long term need political stability and painful economic reform.

For the rest of the world, the dilemma is how to deter the blinkered hardliners and encourage the positive trends in Iran. Yesterday Downing Street sources made it clear that despite Mr Blair's strong words, Britain would continue to work in the UN and with its European partners and Moscow to bring Iran to the table. But No 10 said that the Prime Minister's remarks did amount to a toughening of the British position. Iran was not " getting the message", said a senior aide to Tony Blair.

What Britain and other Western countries privately admit, however, is that sooner or later this opaque, bewildering nation will almost certainly have nuclear weapons. It is less likely to make reckless use of them than might be feared, but that is due more to its own internal checks and balances than any outside influence.

Who wields the real power in Tehran?

Ayatollah Ali Khamenei

Took over as supreme leader on the death in 1989 of his mentor, Ayatollah Khomeini. Figurehead of Iran's conservative establishment, strongly anti-American

President Mahmoud Ahmadinejad

Populist ex-mayor of Tehran. Religious conservative little known abroad, won presidency as voters reacted against unfulfilled promises of reform

Ali Akbar Hashemi Rafsanjani

Ex-president whose comeback bid failed. Retains major influence as head of unelected Expediency Council, which has recently been given more power

Ali Larijani

Head of Supreme National Security Council, which co-ordinates foreign policy. Presidential bid was unsuccessful, despite his being backed by the mainstream conservative coalition

Manouchehr Mottaki

New Foreign Minister, little known before his appointment this summer. Has exhibited tough line on defending Iran's nuclear programme and in opposition to Israel and the US

General Rahin Safavi

Hardline chief of Islamic Revolutionary Guards Corps, which has huge influence over Iran's nuclear programme as well as control of its ballistic missile programme and special forces