Obama says Iran to face toughest possible sanctions

WASHINGTON (Reuters) - President Barack Obama warned Iran on Thursday it would face the toughest possible sanctions for an alleged plot to kill the Saudi ambassador in Washington, as Treasury officials eyed action against the Iranian central bank.

Saudi Arabia on Thursday accused Iran of fomenting instability but pledged a "measured response" over the alleged conspiracy that has heightened tensions between OPEC's two top oil producers.

Saudi Foreign Minister Prince Saud al-Faisal, on a visit to Austria, said that the evidence showed "Iran is responsible" for the suspected assassination plan and said Tehran had tried to "meddle" in the affairs of Arab states before.

In Washington, Obama told a news conference that the United States would not take any options off the table in dealing with Iran, a phrase U.S. officials regularly use toward Tehran that is diplomatic code for the possibility of military action.

"This is part of a pattern of dangerous and reckless behavior by the Iranian government," Obama said in his first public comments on the affair.

U.S. authorities on Tuesday said they had broken up a plot by two men linked to Iran's security agencies to assassinate Saudi Ambassador Adel al-Jubeir. One was arrested last month while the other was believed to be in Iran.

Iran called the accusations a fabrication designed to create tensions in its relations with its neighbors, already under strain over its nuclear program.

"Repeating stupid and useless methods by hopeless Western policy-makers to create Iranophobia will not be fruitful and they will fail again," Iranian Supreme Leader Ayatollah Ali Khamenei was quoted as saying by the official IRNA news agency, although he did not directly address U.S. allegations over the thwarted plot.

FINANCIAL SCREWS

The U.S. Treasury Department said it was weighing more sanctions against Iran's central bank to tighten the financial screws and deepen the country's estrangement from the international financial community.

"We're looking quite intensively at how to ratchet up the pressure," Treasury Undersecretary David Cohen told a Senate committee.

Obama came to office in 2009 promising to seek diplomatic engagement with Iran. But his outreach failed to halt Iran's nuclear advances and he has instead spearheaded several packages of international sanctions.

The plot raises tensions to a new level between the Obama administration and Iran, which says its nuclear work is peaceful and aimed at generating electricity.

Obama told reporters during a news conference with South Korean President Lee Myung-bak the United State would continue "to apply the toughest sanctions and continue to mobilize the international community to make sure that Iran is further and further isolated and pays a price for this kind of behavior."

"Now, we don't take any options off the table in terms of how we operate with Iran, but what you can expect is that we will continue to apply the sorts of pressure that will have a direct impact on the Iranian government until it makes a better choice in terms of how it's going to interact with the rest of the international community," Obama said.

U.S. financial institutions are already generally banned from doing business with any bank in Iran, including the central bank. But the U.S. Treasury said more action, if it had international support, could further isolate the institution.

Republican Senator Richard Shelby said the U.S. government could do a better job in persuading other countries to enforce sanctions laws.

"One problem is that the White House and the State Department have carefully managed to avoid labeling any major Russian, Chinese or other U.S. trading partner's companies as violators of U.S.-mandated sanctions," he said.

The White House has persistently sought to highlight the disparity between Iran's support for popular uprisings against other autocratic regimes in the region and its brutal treatment of protesters at home, and Obama repeated this message.

"We will continue to work to see how we can bring about a Iranian government that is actually responsive to its people but also following the rules of the roads that other countries and the international community follow," he said.

MIDDLE EAST RIFTS

Saudi Arabia's Prince Saud, speaking Vienna where he was discussing opening a religious dialogue center, said Riyadh would hold Tehran accountable.

"Any action they take against us will have a measured response from Saudi Arabia," he said. Asked what actions Saudi Arabia might take, he said: "We have to wait and see."

Iran meanwhile painted the accusation as a plot to create rifts between the two Middle East powers.

"We have no problem with Saudi Arabia ... Though our interpretation of regional developments are different ... I hope Saudis are aware of the fact that our enemies do not want us to have convergence and cooperation," Iran's Foreign Minister Ali Akbar Salehi told state radio on Thursday.

The plot allegations looked certain to play into fears over Iran's atomic ambitions, which the United States and its allies suspect are geared toward producing nuclear weapons.

Glyn Davies, the U.S. envoy to the U.N. International Atomic Energy Agency (IAEA), said on Thursday that Washington hoped a new IAEA report due out next month would "sharpen the case" for referring Tehran to the U.N. Security Council again.

"We expect the IAEA to begin to get more explicitly into the issue of what is called the possible military dimensions of the Iranian nuclear program," he told reporters in Chile, where he was on an official visit.

Some Iran experts were skeptical about the plot, saying they could not see the motive for such an assassination. Iran has in the past killed its own dissidents abroad, but an attempt to target an ambassador of another country would be a highly unusual departure.

Iran said the allegations threaten stability in the Gulf where Saudi Arabia and Iran, the biggest regional powers, have been fierce rivals for decades and Washington has a huge military presence.

Russia, which built a nuclear power plant for Iran and has used pressure on Tehran as a diplomatic tool in its relations with Washington, expressed concern over reports of the alleged plot.

The reports "have been treated with concern in Moscow," Russian Foreign Ministry spokesman Alexander Lukashevich said in a statement late on Wednesday.

(Additional reporting by Angus McDowall in Dubai, Sylvia Westall and Fredrik Dahl in Vienna, Steve Gutterman in Moscow, Alexandra Ulmer in Santiago, Parisa Hafezi and Zahra Hosseinian in Tehran, and Arshad Mohammed in Washington; editing by Anthony Boadle)

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Photo from the US embassy in Chile's photostream.