Iran failed to meet a UN Security deadline on Aug 31. to halt uranium enrichment, which can make fuel for power plants or material for weapons. It now faces the threat of sanctions.

"I think the issue of sanctions is more like a psychological game," Foreign Ministry spokesman Hamid Reza Asefi told a news conference.

Iran has repeatedly shrugged off the threat of sanctions, saying such a move would hurt industrialised economies more than Iran by driving already high oil prices higher still.

"Right now we should think about solving the issues through negotiations. I think the matter of sanctions was only brought up by some Zionist American circles to exert pressure," he said.

The United States said on Friday it was consulting European governments about possible sanctions against the Islamic Republic, but the EU has signalled it wants more dialogue and has agreed to try to clarify Iran's stance within two weeks.

European Union foreign policy chief Javier Solana will meet Iran's chief nuclear negotiator, Ali Larijani, next week to try to clear up ambiguities in Tehran's reply to the major powers' offer of broad cooperation if it stops the nuclear work.

Iran, the world's fourth largest oil exporter which is brimming with petrodollars, says it can cope with any sanctions imposed, but economists say its economy would still suffer from punitive measures such as restrictions on European financing.

Iran has defied Western demands to suspend uranium enrichment, a process that can be used to make nuclear fuel and, in highly extended form, the explosive core of an atomic bomb.

Its rejection of a UN deadline which expired last Thursday to halt enrichment has left it facing a push by the United States for the Security Council to impose sanctions on Tehran.

Annan, in a weekend newspaper interview, expressed reservations over the US drive to impose sanctions, warning patience would prove more effective than sanctions in persuading Iran to suspend sensitive uranium enrichment work.