Western powers will continue a twin track policy of sanctions and diplomacy towards Iran over its nuclear programme, the EU's top diplomat said on Wednesday, despite Tehran's warnings it could backfire.

Britain told Iran it will suffer growing economic and political isolation if it makes the "wrong choice" and fails to comply with U.N. demands on curbing sensitive atomic activities.

But Tehran remained defiant in the long-running standoff over nuclear work it says is designed to generate electricity but which the West fears is aimed at making bombs.

Its deputy foreign minister was quoted as saying the world's fourth-largest oil producer would withdraw assets from Europe in the face of tightening sanctions against the country.

Another senior official, parliamentary speaker Ali Larijani, warned the West against "provoking" the Islamic Republic.

Tehran said on Tuesday that new punitive measures imposed on it this week by the 27-nation European Union over its nuclear plans could damage diplomatic efforts to resolve the dispute.

EU foreign policy chief Javier Solana handed Iran an offer on June 14 of trade and other benefits proposed by the United States, Russia, China, Britain, Germany and France in a new bid to end a row that has helped push oil prices to record highs.

Solana told Reuters on Thursday Iran had still not replied to the incentives offer aimed at coaxing it into halting uranium enrichment, which can have both civilian and military uses, but hoped for an answer soon.

"That is what we were told, that they would think about it and they would give us an answer soon," Solana said in Geneva.

"In the meantime, we will keep the double track open," he said, referring to carrot-and-stick diplomacy towards Tehran. "We want to have a solution which is diplomatically negotiated."

The dispute between the West and Tehran has sparked fears of a military confrontation that would disrupt vital oil supplies. Last week a U.S. newspaper report said Israel had practiced for a possible strike against Iran's nuclear sites.

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Energy experts are concerned any conflict in Iran could lead to a shutdown of the Strait of Hormuz, a narrow waterway separating Iran from the Arabian Peninsula through which roughly 40 percent of the world's traded oil is shipped.

Washington says it is focusing on diplomatic pressure to thwart Iran's nuclear ambitions but has not ruled out military action if that were to fail.

Iran's Revolutionary Guards warned the United States it would face a "tragedy" if it attacked the country.

"If you want to move towards Iran make sure you bring walking sticks and artificial legs because if you came you will not have any legs to return on," Mohammad Hejazi, a senior commander of the elite Guards, was quoted as saying.

Hejazi's comments followed market talk of a military strike against Iran's nuclear sites, which was denied by a senior Iranian nuclear official on Tuesday.

Foreign Secretary David Miliband stressed the importance of a diplomatic solution: "The diplomatic track has to work - the alternatives are appalling," he wrote in a commentary in the International Herald Tribune newspaper.

Iran's refusal to halt enrichment has drawn three rounds of limited U.N. sanctions since 2006 and the EU on Monday agreed new punitive measures targeting businesses and individuals the West says are linked to Iran's nuclear and ballistic programmes.

Deputy Foreign Minister Mahdi Safari said in an interview published on Wednesday that Iran, which is making windfall oil revenue gains, would transfer funds from the EU and invest elsewhere.

"If you withdraw more than $100 billion (50 billion pounds), then of course this will bring about a scarcity of money and have an impact on the world economy," Mahdi told Austrian daily Die Presse.

Europe would lose out as a result of the newly imposed measures, he said: "We have gas and oil resources everyone wants to buy. Now we are trading mostly with Asian countries."