The US government says it is mulling all its options - including the military one - in response to an IAEA report that Iran has begun enriching uranium on a small scale and is slowly building up its enrichment capabilities.
The IAEA recently stated it "has not seen any [Iranian] diversion of nuclear material to nuclear weapons", a charge made by the Bush administration.
However, the nuclear watchdog says there are many outstanding questions about Iran's nuclear programme that the Islamic republic has yet to answer.
Iran plans to set up 3000 enrichment centrifuges later this year.
With talks to resolve the issue appearing less and less likely, the United States and a European Union troika made up of Britain, France and Germany persuaded the watchdog, the International Atomic Energy Agency (IAEA), to report Iran to the Security Council for action.
The current standoff has led to a spate of media stories suggesting the US and/or Israel might be planning a military strike to disrupt Iranian nuclear facilities.
However, Adam Ereli, a spokesman for the US State Department, told Aljazeera.net that a military move "is not something we're looking at right now".
"What we're looking at is diplomatic action with our partners from the international community to prevent Iran from causing trouble which it intends on doing by supporting terrorism and developing a nuclear weapon."
Aljazeera.net contacted the UN mission of the Islamic Republic of Iran in New York but they refused to comment.
Gordon Gray, the US deputy assistant secretary for the Near East, is hoping that the US and European consensus will convince Iran to give up its uranium enrichment programme.
"We've undertaken a deliberate and careful diplomatic approach: First through the EU [troika] then we've taken it to the board of governors and the next step will be the Security Council so it's clear that we're looking at diplomatic multilateral solution that hopefully will bring Iran to its senses," Gray says.
"Iran is taking a pretty deliberate position not to co-operate with the IAEA. It's not a surprise, but it's sad, because it seems it will inevitably lead to a confrontation"
David Albright, former IAEA weapons inspector and head of the Institute for Science and International Security
Asked if the US would push for sanctions, Gray told Aljazeera.net that it was up to the Security Council to decide.
Nadim Shehadi, a fellow at the London-based Royal Institute of International Affairs, believes by referring Iran to the Security Council the US and the European troika are playing for time.
But David Albright, a former IAEA weapons inspector and head of the Institute for Science and International Security in Washington, believes confrontation will be unavoidable.
"Iran is taking a pretty deliberate position not to co-operate with the IAEA," says Albright.
"It's not a surprise, but it's sad, because it seems it will inevitably lead to a confrontation."
Micheal Eisenstadt, director at the Washington Institute for Near East Policy, told Aljazeera.net that if international diplomacy failed to convince Tehran to desist, Israel would find it necessary to take military action against Iran.
Shaul Mofaz, Israel's defence minister, recently told reporters that Israel was willing to let diplomacy run its course for now.
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However, he added, Israeli leaders could not stand by indefinitely waiting for Iran's programme to be reined in and said Israel would take all necessary steps to defend itself from a possible nuclear attack.
Israel did just that to the nascent Iraqi nuclear weapons programme in 1981, destroying its Osirak facility in a surprise air attack.
But it would be difficult for Israel to achieve similar success in Iran, says Eisenstadt, because its nuclear sites are dispersed around the country and heavily protected.
Perhaps further complicating the issue is the US government's stated purpose of not only halting Tehran's nuclear ambitions but also toppling the Iranian government.
George Bush, the US president, wants to help combat what he says are the repressive policies of a clerical regime by launching an $85-million "soft diplomacy" effort to support moderates and democratic forces in Iran.
Most of the new money would go to fund round-the-clock Farsi language television and radio broadcasts into Iran, with the rest destined for efforts to promote civil society groups, student exchanges, internet access and other programmes.
The State Department has also created an Office of Iran Affairs, one of several Iran-focused initiatives.
The others are Persian-language designated political and economic reporting from Dubai, as well as public diplomacy outreach from there, and similar functions in Baku, Frankfurt, Istanbul, and London.
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These are part of an overall effort to re-establish a cadre of Persian-speaking foreign-service officers and the State Department's Iran expertise to address the Iran challenge.
Manouchehr Mottaki, Iran's foreign minister, has responded by suggesting the money would be better spent on investigating why "hatred of the US has increased throughout the world in recent years".
Russian diplomats, who maintain close ties with Tehran, have been working to defuse the crisis and find a diplomatic solution.
They hailed Iran's agreement in principle to a Russian deal to supply enriched uranium for Iran's civilian energy programme without the process taking place inside Iran.
All five members of the UN Security Council have backed the plan but widespread reservations remain.
"We don't have any indication that Iran is prepared to accept Russia's conditions," says Gray.
Green salt project
The US has also pointed to documents released by its intelligence community which appear to provide newly found links between the country's civilian nuclear activities and its military forces.
The links in question involve a secret Iranian programme called the Green Salt project contained in a laptop computer which diplomats in Vienna say was given to German intelligence agents in Tehran in 2004.
"One, if it (the US) wants a solution it is going to have to engage with Iran directly. And secondly, the US is going to have to make a decision about what Iran has to do to take the military option off the table. However, the US is not prepared to do either"
The Iranians say the information in the laptop was false.
Former IAEA weapons inspector Albright says the Green Salt project is still not a "smoking gun".
"The US is going to have to confront its demons about Iran and make two decisions: One, if it wants a solution it is going to have to engage with Iran directly. And secondly, the US is going to have to make a decision about what Iran has to do to take the military option off the table," he said.
"However, the US is not prepared to do either."