Iran's showdown with the West slid closer to dangerous confrontation on Tuesday as international alarm over a new uranium enrichment plant raised the stakes.

Both sides were digging in, with Iran's defiance hardening and the United States and European Union actively taking steps to fracture the Iranian economy through further sanctions.

China, which rejects sanctions, warned of disastrous consequences if the Iranian nuclear row escalated into conflict, while Japan said it was "very concerned."

The UN atomic agency's confirmation Monday that Iran had begun enriching uranium in a new, underground bunker southwest of Tehran was seized upon by the US, Britain, France and Germany as an unacceptable "violation" of UN Security Council resolutions.

Russia, which has relatively close ties with Iran, also voiced concern on over the new plant.

"Moscow has with regret and worry received the news of the start of work on enriching uranium at the Iranian plant," the foreign ministry was quoted as saying by the ITAR-TASS news agency.

Iran's envoy to the International Atomic Energy Agency (IAEA), Ali Asghar Soltanieh, tagged the West's stance as "politically motivated".

The underground Fordo plant had been revealed two years ago and documented, he said. The 20-percent enriched uranium it was to produce would be used for "peaceful and humanitarian" purposes, namely isotopes for cancer treatment, he said.

Both Soltanieh and the IAEA stressed the UN nuclear watchdog had 24-hour cameras there and inspectors to keep it under watch.

That seemed unlikely to reassure the United States, though, or its chief Middle East ally, Israel, analysts said.

"Israel, which has already warned Iran that it could take military action against installations, is very, very worried by this facility... We are moving into dangerous territory," said Mark Hibbs of the Carnegie Endowment for International Peace.

But while Iran downplayed the significance of Fordo -- and affirmed it was ready to resume nuclear talks with world powers that collapsed a year ago -- it continues to send tough signals to states contemplating further sanctions.

Its elite Revolutionary Guards have said they are about to launch new navy manoeuvres in the Strait of Hormuz, at the entrance of the Gulf, a move aimed aimed at showing the Islamic republic can close the waterway if its oil exports are blocked or severely curtailed.

China, which buys 20-22 percent of Iran's crude oil, warned against conflict.

"We urge all relevant nations to... refrain from taking actions that will intensify the situation and make common efforts to prevent war," Chen Xiaodong, a top Chinese diplomat on Middle East affairs said in an online interview with his country's state press.

"Once war starts in this region not only will the relevant nations be affected and attacked, it would also... bring disaster to a world economy deep in crisis," he said.

The United States has said closing the strait would be a "red line" and it would continue deploying its warships to the Gulf.

Oil prices rose strongly in line with rising equities and the weak dollar, and as simmering tensions in Iran and Nigeria also provided support, analysts said.

New York's main contract, West Texas Intermediate crude for delivery in February, rallied $1.57 to $102.88 a barrel.

Brent North Sea crude for February jumped $1.00 to $113.45 in late afternoon trade.

The European Union, meanwhile, is poised to declare a ban on Iranian oil imports.

An EU foreign ministers' meeting on the issue scheduled for the end of this month has been brought forward to January 23, an EU official told AFP.

French Foreign Minister Alain Juppe said other major oil exporters would increase their production in order to steady world markets if the embargo is imposed.

"We have made discreet contacts in this direction. The producers don't want to talk about it, but they are standing ready," Juppe said.

On New Year's Eve, US President Barack Obama signed into law sanctions against Iran's central bank due to come into effect within months.

And Treasury Secretary Timothy Geithner was in Beijing on Tuesday in an effort to get China to drop its steadfast opposition to new sanctions on Iran and to come on board, at least to some extent.

Japan's foreign minister, on a Gulf tour to seek assurances over oil supplies, also raised the alarm and called for a diplomatic solution. His country buys about 14 percent of Iran's crude.

"Japan is very concerned about the latest developments," Koichiro Gemba said. "We believe that we should solve the problem diplomatically and peacefully. That is why dialogue with Iran should continue."

Iran depends on oil sales for 60 percent of its government revenues and last year, it earned about $100 billion from petroleum exports. Existing sanctions have complicated payment, though.

For his part, Iranian President Mahmoud Ahmadinejad said on Tuesday that his country was "fighting to establish solidarity and justice."

He was in Nicaragua to attend President Daniel Ortega's inauguration to a third term Tuesday, the second stop on a tour of Latin American allies.

Ahmadinejad is due to meet President Raul Castro in Cuba on Wednesday, before traveling to Ecuador on Thursday.

burs/al