Iran defied a United Nations Security Council deadline to halt uranium enrichment, the UN watchdog International Atomic Energy Agency (IAEA) reported in Vienna Thursday, setting the stage for possible UN sanctions against the Islamic Republic.

In July the council demanded that Iran suspend all enrichment-related activities by August 31, spurred by US-led concerns that Tehran's nuclear programme is a covert attempt to produce nuclear weapons.

Uranium enrichment makes fuel for civilian nuclear reactors, but in highly refined form can serve as the raw material for atom bombs.

But "the United States doesn't have any instruments powerful enough to convince or coerce Iran to suspend its uranium enrichment program. Neither incentives nor threats are sufficient," Gary Samore, a Chicago-based non-proliferation analyst who was a disarmament expert in the administration of former US President Bill Clinton, told AFP.

A senior diplomat close to the IAEA said "the whole reason of the UN deadline was to weaken Iran, but it didn't work."

Despite a more than three-year IAEA investigation Iran has managed to build up its nuclear program to the point where it is now enriching uranium with a 164 centrifuges when in the beginning they had none, the diplomat added.

"If the Americans had struck a deal, or talked directly with Iran a year ago, they could have frozen the program before they had done any enrichment," the diplomat said.

For his part, Samore said: "Things have gotten worse because two or three years ago the Iranians were still nervous about Security Council action and US military attack and so prepared to limit their projects but now the Iranians are ultra-confident" as the United States is bogged down militarily in Iraq.

In addition, diplomats noted that Russia and China, two veto-holding permanent members of the Security Council and close trading partners with Iran, are reluctant to impose sanctions.

They also said that countries like Italy and Japan, which are in the background on this issue but are key Western allies, were against sanctions that would hurt their considerable economic interests in Iran.

Mark Fitzpatrick, an analyst at the International Institute for Strategic Studies (IISS) think tank in London, said however that while the situation was grim, it was not lost.