Iran's announcement that it has expanded its uranium enrichment sets the stage for a US push for more sanctions, but also for a parallel European bid to negotiate a way out of the crisis, US officials and analysts said.
President Mahmoud Ahmadinejad used a high profile speech at Iran's main nuclear site on Monday to announce that the country had set up an "industrial scale" operation to enrich uranium.
Non-proliferation experts said industrial scale would mean operating around 3,000 centrifuges to produce enriched uranium, compared to the 164 centrifuges Iran had previously declared.
Iran is aiming to have 50,000 centrifuges running, said Gholam Reza Aghazadeh, head of Iran's atomic energy organisation.
Iran has already been hit with two sets of UN sanctions for refusing to suspend its reprocessing work, which the West fears is aimed at producing nuclear weapons but Tehran insists is only designed to make fuel for atomic power stations.
Experts suggested Iran's latest act of defiance could provide the basis for a face-saving resolution of the crisis when European and Iranian negotiators meet in coming weeks.
But the US responded sharply to Ahdaminejad's statement, saying Iran's continued defiance would lead to tougher sanctions. The last sanctions resolution adopted on March 24 set a 60-day deadline for Iran's compliance.
"We are very concerned about Iran's announcement that they entered an 'industrial stage' of nuclear fuel production," White House national security spokesman Gordon Johndroe told reporters.
State Department spokesman Sean McCormack said Iran was "almost completely encircled by the international community because of their actions, and that pressure is only going to increase if they persist."
McCormack would not say what kind of action Washington would seek in addition to financial and other UN sanctions already targeting Iran. "But certainly there is a potential of more (UN) resolutions of similar type down the road," he said.
McCormack however also held out the option of a "negotiated pathway" through the crisis which would involve Western nations providing Iran with aid and other incentives -- including help developing a civilian nuclear power industry -- if Tehran suspends its uranium enrichment program.
Talks between the European Union's foreign policy chief, Javier Solana, and Iran's chief nuclear negotiator, Ali Larijani, are due to resume soon, though no dates have been announced, McCormack said.
Some experts expressed doubt Monday that the Iranians had actually begun to enrich uranium with their larger array of centrifuges for fear of torpedoing the new round of negotiations.
"The purpose today was to publicly state that they had the centrifuges," said David Albright, a former UN nuclear inspector and now president of the Washington-based Institute for Science and International Security.
"It would be a big surprise though if they did start to enrich," he said, arguing that putting the centrifuges into action would "seriously reduce their chances of having any meaningful negotiations with the Europeans."
"I think they're holding back."
Albright suggested the Iranians wanted to establish some "facts on the ground" ahead of the new talks by showing they had mastered the technology of building centrifuges.
"I think Ahmadinejad wanted to lay out very clearly that they've achieved a certain level and you better accept it," he said.
A possible compromise with the Europeans could involve Iran pursuing its centrifuge development but freezing actual uranium enrichment pending negotiations with the US and its major power allies, he said.
But it was unlikely the US would agree to such a plan, he said.
George Perkovich, another non-proliferation expert with the Carnegie Endowment for International Peace, said Iran's success in furthering its enrichment program could provide an opening for negotiations.
"They think that if they did what the Security Council called for and suspended enrichment, it would be a sign of weakness," he said.
"Now they can claim success and you could turn it into an argument that says: 'Fine, congratulations, you did what you set out to do, now you can take a break'," he said.