Israel's outgoing Prime Minister Ehud Olmert shot a thinly-veiled warning at Iran on Thursday after its arch-enemy announced the completion of its first nuclear power plant.

"We are a strong country, a very strong country, and we have at our disposal (military) capacities the intensity of which are difficult to imagine," Olmert told public radio.

"We have deployed enormous efforts to reinforce our deterrence capacity," he said. "Israel will be able to defend itself in all situations, against all threats, against all enemies. I cannot say more but believe me, I know what I'm talking about."

Although the remarks did not mention Iran by name they were clearly aimed at the Islamic republic which Israel considers its enemy number one.

Iran on Wednesday began testing the nuclear power plant in the Gulf port of Bushehr and said the long-delayed project could go on line within months.

Israel, widely believed to be the Middle East's sole nuclear armed power, and the United States accuse Iran of seeking to develop nuclear weapons but Tehran says its atomic programme is purely for peaceful purposes.

Olmert's remarks came a day after Defence Minister Ehud Barak said the continuation of Iran's nuclear programme "is a potential danger for the existence of the state of Israel.

"Our position is clear. Sanctions are necessary but Israel does not rule out any option and suggests other countries do the same," Barak said.

Benjamin Netanyahu, the hawk tasked with forming Israel's next government after the February 10 election, said Iran was the top challenge facing the country.

"Iran is seeking to arm itself with nuclear weapons and is the most serious threat to our existence since the war of independence" in 1948, he said.