Iran announced on Monday it had sentenced a dual U.S.-Iranian citizen to death as a spy, and diplomats said it had switched on a uranium enrichment plant deep inside a mountain, actions certain to infuriate the West.
The moves come at a time when new U.S. sanctions are causing real economic pain, Iran has spooked oil markets with threats to international shipping, and an election in two months is widening political divisions at home.
The United States denies Arizona-born 28-year-old Amir Mirza Hekmati is a spy, and has demanded his immediate release.
Iran has aired a televised confession, denounced by Washington, in which Hekmati said he worked for a New York-based video game company designing games to manipulate public opinion in the Middle East on behalf of U.S. intelligence.
"Amir Mirza Hekmati was sentenced to death ... for cooperating with the hostile country America and spying for the CIA (Central Intelligence Agency)," ISNA news agency quoted judiciary spokesman Gholamhossein Mohseni-Ejei as saying.
"The court found him Corrupt on the Earth and Mohareb (one who wages war on God). Hekmati can appeal to the Supreme Court."
Separately, two diplomats in Vienna, where the U.N. nuclear watchdog is based, said Iran had finally carried out a long-planned step to begin enrichment of uranium at a site deep under a mountain near the Shi'ite Muslim holy city of Qom.
Uranium enrichment in the Fordow bunker is probably the single most controversial part of Iran's nuclear program, which Tehran says is peaceful but the West says is aimed at building an atomic bomb.
The long-simmering nuclear dispute has come to a boil in recent weeks, with the West imposing new sanctions that are having a real impact on Iran's economy, and Tehran responding with threats to international shipping that rattled oil markets.
After years of Western sanctions that had little effect, U.S. President Barack Obama signed a new measure into law on New Year's Eve that, if fully implemented, would prevent most countries from buying Iranian oil.
The European Union, which still buys about a fifth of Iran's oil, is poised to announce an embargo at the end of this month, and other countries may have to cut purchases of Iranian crude to receive waivers from the U.S. sanctions.
Buyers are demanding deep discounts to trade with Tehran, cutting the revenue that it needs to feed its 74 million people.
Defiant
Iran has remained defiant. In a televised speech on Monday, Supreme Leader Ayatollah Ali Khamenei said: "Sanctions imposed on Iran by our enemies will not have any impact on our nation."
"The Iranian nation believes in its rulers."
The rial currency has plunged and Iranians have scrambled to withdraw savings from banks to buy dollars. The hardship comes just two months before a parliamentary election, Iran's first since a 2009 presidential vote that triggered eight months of angry street demonstrations.
Iran's rulers put those protests down by force but, in the two years since, the Arab Spring has shown the vulnerability of authoritarian governments in the region to uprisings fuelled by public anger over economic hardship.
Iran has responded to the new sanctions by threatening to shut the Strait of Hormuz, the outlet for ships carrying oil from the Gulf, guarded by a huge U.S.-led international fleet.
Brent Crude was trading at around $113 a barrel on Monday, up by about $6 in the nine days since Obama signed the new sanctions into law. Iran's military threats and sanctions news have caused spikes in the price throughout recent weeks.
Enrichment
Iran disclosed to the International Atomic Energy Agency in 2009 that it was building the nuclear facility beneath a mountain at Fordow, but only after learning that it had been detected by Western intelligence.
Tehran says it intends to enrich uranium to 20 percent purity with centrifuges there. The West says uranium that pure is not necessary for power plants and is a step towards a bomb.
"All of Iran's enrichment activity is in violation of (United Nations) Security Council resolutions and any expansion of its capacity at Fordow just compounds those violations," said a Western diplomat in Vienna.
Locating the enrichment facility inside a mountain makes it harder for Israel or the United States to destroy it. Both countries say a military option remains on the table.
On Sunday an Iranian newspaper had quoted the head of Iran's Atomic Energy Organisation as saying enrichment in the bunker would begin in the "near future."
Nuclear talks between Iran and global powers collapsed a year ago. Iran has said it wants to restart them, but the West says Tehran must first make clear it is willing to discuss a halt to uranium enrichment. Starting enrichment at the bunker could make it harder to revive talks and lift sanctions.
Diplomacy was made more difficult late last year when European countries withdrew their ambassadors after protesters stormed the British embassy in Tehran in November. France said on Monday its ambassador had returned.
"Spy Network"
In an apparently separate case from that of Hekmati, Iran also said on Monday it had broken up a U.S.-linked spy network that planned to "fuel unrest" ahead of the March election.
"The detained spies were in contact with foreign countries through cyberspace," Intelligence Minister Haydar Moslehi was quoted by state television as saying. He gave no information about the nationalities and the number of those detained.
Hekmati's execution could still be blocked by Iran's highest court, which must confirm all death sentences.
His family says he was visiting grandparents in Iran when he was held in December. His family was unable to hire a lawyer, and he was defended by a state-appointed advocate whom he met for the first time at the trial.
Washington says he has been denied access to Swiss diplomats, who represent U.S. interests in a country where it has had no mission since its embassy was stormed in 1979.
Hekmati previously worked as a U.S. military translator. Iran's Farsi language is one of the two main tongues spoken in Afghanistan, and the U.S. military often deploys Americans of Iranian origin there as translators.
Iran could "hold on to Hekmati and use him - as they have with previous foreign detainees - as a pawn in their rivalry with the United States, rather than execute him immediately and thereby raise tensions with the U.S. even more," said Gala Riani, an analyst at forecasting firm IHS Global Insight.
Tehran, which imposes the death penalty frequently for crimes such as drug dealing and murder, is not known to have executed any U.S. citizen as a spy.
Three U.S. backpackers jailed in Iran as spies in 2009 were freed in 2010 and 2011 in what President Mahmoud Ahmadinejad called a humanitarian gesture. An Iranian-American sentenced to eight years for spying in 2009, was freed after 100 days.
In May Iran said it had arrested 30 people on suspicion of spying for the United States. It later announced that 15 people had been indicted for spying for Washington and Israel.
(Additional reporting by Hossein Jaseb, Mitra Amiri and Ramin Mostafavi)