The European Union may approve fresh sanctions against Iran within weeks, after a U.N. agency said Tehran had worked to design nuclear bombs, EU diplomats said on Thursday.

Iran denies trying to build atom bombs and its Supreme Leader Ayatollah Ali Khamenei said any U.S. or Israeli attack on its nuclear sites would be met with 'iron fists'.

The United States and Israel have refused to rule out any option to prevent Iran from acquiring a nuclear arsenal.

Diplomats in Brussels said preliminary discussions among EU capitals on new measures had begun and plans may be ready for EU foreign ministers in Brussels to approve on December 1.

"Experts are discussing a number of options on the table but it is difficult to foresee the outcome of the debate," one EU diplomat said. Another said he expected a formal decision to be reached on December 1.

Iran already faces a wide range of U.N. sanctions, as well as some imposed unilaterally by the United States and the EU.

New EU sanctions would be a significant part of Western efforts to ratchet up pressure on Tehran after the U.N. nuclear watchdog's report this week that laid bare a trove of intelligence suggesting Iran is seeking nuclear weapons.

The White House said Thursday the report by the International Atomic Energy Agency (IAEA) was 'very alarming' and it would continue to push Tehran to 'change its behavior'.

Western governments would prefer further Security Council measures against Tehran. But Russia and China, both permanent Security Council members with veto power, are opposed and on Thursday said new sanctions would not work.

Tehran, which says its nuclear program is for producing electricity and other peaceful purposes, said Wednesday it remains ready for negotiations with world powers on the issue.

Western diplomats say only sanctions against Iran's energy sector could exert serious pressure on Tehran, but such steps would also hurt a global economy hit by Europe's debt crisis.

EUROPEAN JITTERS

Some EU governments are wary of inflicting economic pain on the Iranian people or of closing potential communication channels by targeting Iranian officials. Others fret about the damage oil sanctions could do to their own economic interests.

Germany, Britain and France, along with the United States, Russia and China, form a group of powers negotiating with Iran. The last round of talks stalled at the start of this year.

Tension over Iran's nuclear program has increased since Tuesday when the IAEA reported that Tehran appeared to have worked on designing a bomb and may still be conducting secret research to that end.

Media speculation about possible U.S. or Israeli military action has also intensified since the IAEA report, denounced by Iran as 'unbalanced' and 'politically motivated'.

Khamenei said Iran would retaliate against any attack by its foes, but had no intention of starting a 'bloody war'.

"Our enemies, particularly the Zionist regime (Israel), America and its allies, should know that any kind of threat and attack or even thinking about any (military) action will be firmly responded to," Khamenei said on state television.

STRONG SLAPS

"The Revolutionary Guards and army and our nation ... will answer attacks with strong slaps and iron fists," he added.

In a sign of growing concern over a possible escalation in the nuclear standoff, U.N. Secretary General Ban Ki-moon on Thursday called for a diplomatic solution.

"The secretary-general reiterates his belief that a negotiated rather than a military solution is the only way to resolve this issue," U.N. spokesman Martin Nesirky told reporters.

Israel reacted to the IAEA report by urging world powers to stop Iran from getting nuclear weapons, saying Tehran's pursuit of such arms endangered 'the peace of the world'.

A close strategic ally of Western powers, Israel is widely believed to have the Middle East region's only nuclear arsenal, dating back decades. It has never confirmed or denied this, under a policy of ambiguity designed to deter attacks.

Israel bombed Iraq's Osirak atomic reactor in 1981 and carried out a similar strike in Syria in 2007.

Iran's announcement last year that it had escalated uranium enrichment from the low level needed for electricity production to 20 per cent, alarmed many countries that feared it was a key step toward making material potent enough for a nuclear bomb.

Tehran says it needs the fuel to make isotopes for cancer treatment. A leading Israeli investment firm said Thursday any military strike on Iranian nuclear facilities would exact an economic price too high for the world to accept.

A oil price surge, the costs of war and damage to global trade would be too great and would deter world powers from serious action, said Amir Kahanovich, chief economist at Clal Finance, one of Israel's largest brokerage houses.