The European Union's decision to impose an embargo on Iran's oil exports is seen by Tehran as a virtual declaration of war, increasing the prospects of conflict in the strategic Persian Gulf.

Tension is sure to sharpen dangerously between now and July 1, when the EU embargo kicks in, as the confrontation between Iran and the West lurches into an unpredictable phase.

The EU decision Monday "raised the stakes dramatically in the war of wits between Iran and the West," observed analyst Ian Traynor in British newspaper The Guardian.

Growing friction over Iran's contentious nuclear program, which lies at the root of the standoff, the West's covert war of assassination and sabotage, and the deepening impact of United Nations-led sanctions imposed in 2010 are combining to heighten the prospect of a military collision.

A U.S. naval buildup, involving up to three carrier strike groups, and large-scale Iranian naval maneuvers have heightened fears of conflict, either by accident or design.

Monday's decision by the EU's foreign ministers in Brussels followed U.S. President Barack Obama's New Year's Eve unilateral action against Iran's central bank which handles the country's oil transactions.

The 27-member European Union imports some 20 percent of Iran's daily oil production of 2.6 million barrels per day.

Iran, the Organization of Petroleum Exporting Countries' second biggest producer after Saudi Arabia, can still export oil to China, India and elsewhere in Asia, its key market.

But these will be at huge discounts. That will take a sizeable bite out of Iran's oil revenues, the backbone of its already struggling economy. Iranian officials admit the punitive measures are having a serious effect, with food prices rising 40 percent in the last few weeks.

The difference between the economic sanctions in place and the oil embargo that is taking shape is that the latter will hit all levels of Iranian society. That will represent a threat to the fundamentalist clerical regime in Tehran, currently splintered in a power struggle between hard-line conservatives led by Ayatollah Ali Khamenei, the supreme leader, and a radical faction under the politically ambitious President Mahmoud Ahmadinejad ahead of 2012 parliamentary and 2013 presidential elections.

This rivalry for control of Iran's future, some analysts say, heightens the dangers that Tehran may opt to carry out its threat to close the Strait of Hormuz, the vital oil export route out of the gulf, if the West tries to cut off its oil revenue.

"It is in terms of internal Iranian politics that a potential naval conflict around the Strait of Hormuz may become a reality," analyst Babak Rahimi of the University of California, San Diego, observed in a Jan. 12 analysis for the Jamestown Foundation, a Washington think tank.

The recent U.S. allegations of an Iranian plot to assassinate the Saudi Arabian ambassador in Washington and the storming of the British Embassy in Tehran underline the fault lines running through Iran's ruling elite.

These two events "ultimately reveal … the unstable nature of Iran's faction-ridden politics and the degree to which such a volatile environment could have an unpredictable impact on Iranian decision-making, possibly leading to a military conflict in the Strait of Hormuz," Rahimi noted.

"To many in Washington, Iran's latest military posturing may seem mere bluster but … the key is to understand that behind any Iranian military actions there's a political heartbeat and at the moment the Iranian power structure, feeling threatened by domestic problems and U.S. military activities in the region, is getting ready for war," Rahimi concluded.

Some analysts say the Western alliance against Iran is primarily intended to bring about regime change in Tehran, or at least produce a regime more acceptable to regional powers like Saudi Arabia, Iran's archrival in the Middle East.

But the converse may be what emerges, setting back any prospect of a rapprochement.

Unless the elite Islamic Revolutionary Guard Corps, the most powerful military force in Iran, is pulverized in any U.S. air campaign if fighting erupts, there are those who fear it will emerge as the main beneficiary of the gulf crisis.

"The IRGC has ambitions of becoming an expansive military, economic and political conglomerate along the lines of the militaries in Pakistan and Egypt," observes analyst Brian M. Downing on Asia Times Online. "Ongoing events will help to advance those ambitions."