The measures go well beyond sanctions imposed by the United Nations last month and mirror steps taken by the United States in recent weeks to apply extra pressure on Tehran to return to negotiations over its uranium enrichment programme.

As well as adopting harsher sanctions, including targeting Iranian banks and insurance companies, the foreign ministers called on Iran to resume talks over its enrichment work, which Western powers see as a veiled quest to develop nuclear weapons.

“This is increased pressure on Iran to enter into negotiations about their whole nuclear programme,” Foreign Secretary William Hague told reporters as he arrived for the meeting in Brussels and before the measures were approved.

“I hope Iran takes from this message that European nations are open to negotiations about the nuclear programme, but if they don’t respond, we will intensify the pressure.”

The extra sanctions, which also limit dealings with Iran’s state shipping company and air cargo transporters, will not legally come into force until they are published in the European Union’s official journal on Tuesday, diplomats said.

“The annex is extremely detailed and sets out precisely which Iranian entities — banks, insurance companies, shipping and cargo lines — are blocked,” one diplomat said. “Once it’s published, there is a legal obligation to comply.”

Perhaps the hardest-hitting element of the sanctions is the move to prohibit new investment in and technical assistance to Iran’s refining, liquefaction and liquefied natural gas sectors, which are a mainstay of Iran’s energy-based economy.

Iran denies it is enriching uranium to fuel atomic bombs, saying the programme is for energy and medical purposes only.

PRESSURE AND DIPLOMACY ALIKE

The broadened sanctions are intended to put strong financial heat on Iran, which is the world’s fifth largest crude oil exporter but has little refining capability and depends on gasoline imports for domestic consumption.

Diplomats have also acknowledged, however, that the impact of the sanctions will depend on steps to ensure compliance.

Traders said this month Iran was depending more on friendly countries for fuel supplies to sidestep sanctions intended to hinder its fuel imports, and was buying about half of its July gasoline imports from Turkey and the rest from Chinese sellers.

But analysts said that while countries such as China, Turkey and Malaysia might step in to furnish Iran with goods it would now not be able to get from the European Union, the EU’s sanctions were still well-enough designed to be effective.

“Most of the sectors that have been targeted in the EU sanctions are ones over which Europeans have a substantial leverage,” Mark Fitzpatrick, an Iran specialist at the International Institute for Strategic Studies, told Reuters.

“Not so many other countries can provide the kind of financial services that will be cut off. Few other countries supply technology for liquefied natural gas, nobody else does re-insurance…The European Union has very wisely found areas over which it has real leverage and cannot be supplanted.”

As part of its “dual-track” approach twinning sanctions and diplomacy, however, the EU is also hoping that Iran will agree to resume long-moribund negotiations in the coming weeks.

The EU foreign affairs chief, Catherine Ashton, and Iran’s chief nuclear negotiator, Saeed Jalili, have exchanged letters in the last few weeks and it looks possible that they will meet for talks as early as September, diplomats say.

But Iran experts caution that any resumption of talks — the first negotiations with the West since October 2009 — are unlikely to produce quick results, rather more likely to begin a lengthy process of Iran manoeuvring to get sanctions lifted and the West seeking a moratorium on its uranium enrichment.

The Islamic Republic has said that it has an inalienable right to its own nuclear development for peaceful purposes without restrictions and this will not be negotiable.

Ambassador Seyed Hossein Rezvani received the protest in an urgently called meeting with State Secretary Espen Barth Eide.

Ahmadinejad, speaking during a visit to China’s commercial capital of Shanghai, called the U.N. Security Council a tool of the United States and branded Wednesday’s resolution, triggered by a nuclear programme the West believes is aimed at developing atomic weapons, “a piece of worthless paper.”

The five veto-holding members of the Security Council wanted to monopolise nuclear energy for themselves, and the new sanctions would serve only to speed up Iran’s development, he said.

“In our view, the resolution lacks legal value. It indicates the weakness of the countries who initiated the resolution,” the president said, speaking through a translator.

“The nuclear issue is just an excuse or pretext. The government of the United States is going to swallow the whole Middle East region,” he added. “The Security Council is too in the hands of the United States. It does not belong to nations, its structure is not democratic.”

Iran was hit with a new round of U.N. sanctions on Wednesday over its nuclear activities. China watered down the package agreed by the United Nations, but still voted for it.

Asked about China’s support, Ahmadinejad said Iran’s main problem was with the United States, and that ties with China would not be affected.

“There is no reason to control or weaken the relationship. The main problem is with the United States. That must be resolved.”

China, which buys millions of barrels of oil from Iran every year, had opposed new restrictions on Tehran for months. The impact of the sanctions was also lessened by Turkish and Brazilian votes against it.

The resolution extended punitive measures against Iran over its protracted refusal to suspend sensitive uranium enrichment activity and open up to U.N. nuclear inspectors.

Ahmadinejad is in Shanghai to attend the Iran day at the ongoing World Expo. China’s Foreign Ministry says the visit is purely related to that event and that he is not scheduled to meet any Chinese leaders to discuss the nuclear issue.

At an earlier ceremony, Ahmadinejad spoke of his hopes of building a “better world” and praised Iran-China relations.

“The two great nations of Iran and China, who are the owners of the most ancient civilisations of human beings, can stay together to make this dream come true,” he told a mostly Chinese and Iranian audience.

European leaders are expected to agree next week on the need for further sanctions on Iran beyond those imposed by the United Nations on Wednesday, and the U.S. Congress is also expected to pass additional restrictions, possibly this month.

Mahmoud Ahmadinejad also says new sanctions would be a big mistake and that U.S. President Barack Obama stands to lose unless he changes his policies toward Iran. He did not elaborate.

The Iranian leader was speaking Tuesday, days before the U.N. Security Council is expected to vote to punish Tehran for its refusal to heed demands to curb its nuclear program.

The International Atomic Energy Agency has singled out Iran for the first time as a “special case.”

Turkey and Brazil recently announced a fuel-swap agreement with Iran aimed at addressing international concerns over Tehran’s suspicious nuclear program.

Iran’s Fars news agency, quoting a senior official from Tehran municipality, said the loan would have a repayment period of three to four years.

“The one-billion-euro Chinese funding is materialising,” Hossein Mohammad Pourzarandi said, adding that the loan would be used for several construction projects, including road networks, undertaken by the municipality.

In recent years China has emerged as Iran’s main trading partner, with increased exposures in key economic sectors of the Islamic republic, including oil.

Several Western energy companies have left Iran amid the increasing possibility of a new round of UN sanctions against Tehran for pursuing its controversial nuclear programme of uranium enrichment.

They are being replaced mainly by Chinese and Iranian firms.

European shares rallied from nine-month lows but the euro remained under pressure amid continuing signs of banks’ reluctance to lend to euro zone counterparts exposed to southern European sovereign debt.

Geithner’s stress on coordination on new regulation appeared aimed chiefly at Germany, Europe’s biggest economy, which stunned markets and angered European partners by unilaterally banning some speculative financial trades.

He is due to meet German Finance Minister Wolfgang Schaeuble in Berlin on Thursday after talks with new British counterpart George Osborne and Bank of England Governor Mervyn King in London on Wednesday and dinner in Frankfurt with European Central Bank President Jean-Claude Trichet.

“I’m going to meet the new UK government to prepare for the next stage of global financial reform — on the heels of what we expect to be a quick passage of U.S. reforms — to emphasise the importance of a carefully designed global approach, and to discuss developments in Europe,” Geithner told reporters aboard an overnight flight from China.

Business television channel CNBC said he would also urge the Europeans to stress test their banks to identify those that need new capital and restore market confidence in the banking system.

European regulators conducted a confidential assessment of the solvency of national banking systems last September, but their reassuring conclusion failed to dispel doubts because they did not test individual banks or publish detailed findings.

European bank shares slumped on Tuesday in the wake of the Bank of Spain’s takeover of a small regional savings bank, CajaSur, amid concerns that a sovereign debt crisis that began with Greece may turn into a wider banking crisis.

The costs for banks to borrow dollars from each other reached the highest levels in 10 months on Tuesday.

Investors are not confident that measures so far, including Germany’s ban on naked short-selling of some securities, austerity plans by indebted euro zone members or even a 750 billion euro $926 billion (643 billion pounds) rescue fund will be enough to prevent Europe’s woes from derailing the global recovery.

The Paris-based Organisation for Economic Co-operation and Development said the global economy was recovering faster than expected from recession with Asia leading the way but remained at risk from huge debts in developed countries.

It also said banks remained vulnerable, noting the high price of credit default swaps to protect bank bond investments.

Any European stress tests would have to differ from those conducted by U.S. regulators early last year, because Europe lacks a huge bailout fund like the $700 billion Troubled Asset Relief Program to plug any capital deficiencies found.

Geithner and other Treasury officials routinely cite the U.S. stress tests, which helped open the door for private capital to return to the banking sector, as calming intense market turmoil caused by the financial crisis.

GERMAN BANS “COUNTER-PRODUCTIVE”

A senior U.S. Treasury official said Washington was unhappy with Berlin’s “counter-productive” decision to go it alone in banning naked shorting of shares in top financial companies and sovereign euro bonds and related transactions in sovereign credit default swaps.

Geithner has also criticised European Union proposals to regulate hedge funds and private equity, warning that they could discriminate against non-European funds.

Far from yielding to unanimous criticism from Washington, Paris and London, Berlin proposed on Tuesday extending restrictions on such speculative trades to include all shares, a government source said.

Chancellor Angela Merkel reaffirmed on Wednesday that Germany would do everything in its power to support a strong euro and said the competitiveness of all European Union states must be aligned.

“Germany, as the largest economy in the EU, has profited greatly from the euro,” she said during a visit to Saudi Arabia. “Therefore, we will do all we can for a strong euro.

AUSTERITY DRIVE

In the latest move in a German-inspired Europe-wide austerity drive meant to restore market confidence, Italy’s cabinet approved a multibillion-euro package of budget cuts designed to slash the government’s deficit to beneath the EU ceiling of 3.0 percent of GDP by 2012.

A draft of the 24 billion euro ($29.49 billion) plan obtained by Reuters included a four-year freeze on public sector salaries, and a reduction in state personnel by replacing only one in five of those who leave.

Italy joined Greece, Spain, Portugal and Britain in trying to slash deficits but the downside could be slower growth.

“There is indeed a risk that, under market pressure, some countries overdo austerity,” Olivier Blanchard, chief economist of the International Monetary Fund, said in a newspaper interview. “That would be a mistake.”

Worries that the European debt crisis could engulf banks have pushed the global benchmark borrowing rate of three-month LIBOR to a 10-month high.

Money markets are “pricing in for a credit crunch,” said Michael Pond, Treasury strategist at Barclays Capital in New York. “A crisis of confidence is developing once again.”

The U.S. Federal Reserve could cut the rate it charges the European Central Bank for dollar supplies via swaps if the debt crisis worsens, the Wall Street Journal said.

Panahi, winner of many international awards and a supporter of opposition leader Mirhossein Mousavi in last year’s disputed presidential election, was arrested in March along with his wife and daughter. His family was later freed.

Despite his release, the office of Tehran’s prosecutor said his case and the indictment against him would be submitted to the capital’s Revolutionary Court, IRNA said, suggesting he may still face trial. It did not give further details.

Panahi’s wife Tahereh Saeedi earlier said the bail had been deposited and that he was expected to be freed on Tuesday evening. He has been held at Tehran’s Evin jail, where human rights groups say many political prisoners are detained.

French film star Juliette Binoche criticised Iran for imprisoning Panahi during her acceptance speech for the best actress award at the Cannes film festival on Sunday, saying “his fault is to be an artist, to be independent.”

Panahi had said he would not end his hunger strike until he was allowed to have access to his lawyer, receive visits from his family and be unconditionally released until a court hearing was held. His family and lawyer visited him last week.

“We had a meeting with him on Thursday along with the prosecutor and although his general health condition was good he looked physically weak,” Saeedi said.

Panahi, whose films often examines social issues faced by women in the conservative Islamic state, had been due to sit on the jury of the 2010 Cannes festival.

He won the festival’s Camera d’Or prize for his 1995 movie, “White Balloon” and senior French government ministers called on Iran this month to free him.

Iran’s election in June last year plunged the Islamic state into months of political turmoil.

The pro-reform opposition says it was rigged to secure the re-election of President Mahmoud Ahmadinejad but the authorities portrayed the huge protests that erupted after the vote as a foreign-backed bid to undermine the clerical establishment.

Thousands of opposition supporters were detained after the vote. Most of them have since been freed but more than 80 people have been jailed for up to 15 years. Two people put on trial after the election have been executed.

Ahmadinejad was speaking before hundreds gathered inKhorramshahr, about 625 miles (1,000 kilometers) southwest ofTehran, when his speech was interrupted by people shouting “We are unemployed!”

Iran’s economy is struggling under double-digit inflation, 25 percent unemployment and three rounds of U.N. sanctions imposed over Tehran’s controversial nuclear program.

The West suspects the program aims at making nuclear weapons, a charge Tehran denies and says it’s for peaceful purposes such as power generation. Iran is facing a possible fourth round of U.N. sanctions over the program.

The president, whose public events are carefully controlled, calmly continued and did not seem distracted by the disruption. But he later promised the government would cut import taxes up to 25 percent for Khorramshahr and the surrounding oil-rich Khuzestan province.

“There are two important tasks on the shoulder of the Iranian nation: reconstruction of Iran and an effective and strong presence in the global effort for reform and justice,” Ahmadinejad said before the disruption.

He also used the occasion to reiterate his anti-Western rhetoric, claiming that if the West continues to deny Iran’s right to peacefulnuclear energy, the Iranian youth will “slap the mouth of the enemies.”

Ahmadienjad’s trip to Khorramshahr marked the town’s 1982 liberation after an 18-month Iraqi occupation during the 1980-88 Iraq-Iran war.

Khorramshahr’s population is half Arab. The town, affluent before the 1979 Islamic Revolution, has over the past decade complained of slow reconstruction and poor living standards, including lack of potable water and power shortages.

Israel has called for strong economic sanctions against Iran over its nuclear plans but, in a hint of possible military action, has said all options were on the table should diplomacy fail to resolve the dispute.

Israeli officials said the exercise, which will include sounding air raid sirens Wednesday, would focus on municipal authorities’ responses to a scenario in which missiles were launched from the Gaza Strip, controlled by Hamas Islamists, and by Hezbollah guerrillas in Lebanon. Both are allies of Iran.

In public remarks at the start of the weekly cabinet meeting Sunday, Prime Minister Benjamin Netanyahu described Israel’s biggest civil defence exercise as a routine, protective move and said the government sought only “quiet, stability and peace.”

The air raid sirens will sound Wednesday nationwide in a signal to Israelis to take cover in shelters or designated secure areas for 10 minutes, and much of the public is expected to take part in this drill.

In a test of an emergency warning system, the military’s Home Front Command will also send text messages that read — “Have a nice day” — to cellphone owners in certain areas of the country, the army said in a statement to test communications.

Rescue services will be put on a practice emergency footing, while a partial distribution of gas masks is also planned, in addition to air raid drills to be held at schools and hospitals.

FIVE-DAY DRILL

The five-day drill dubbed “Turning Point 4″ has sparked nervousness in the region as diplomatic efforts intensify to curb Iran’s nuclear ambitions, which the West and Israel believe are aimed at building atomic weapons.

Iran denies its uranium enrichment program is a quest for nuclear arms and says it is purely for power. Israel is widely believed to have the Middle East’s only nuclear arsenal.

Itamar Rabinovitch, an expert on Middle East affairs and a former Israeli ambassador to Washington, said Israel must prepare for the possibility Iranian leaders would encourage Hamas and Hezbollah to fire on Israel in the event of stiffer U.N. sanctions against Iran.

“We must show we don’t intend to be sitting ducks in the event of such an attack,” Rabinovitch said.

Hezbollah fired more than 4,000 rockets into Israel during the 2006 Lebanon war. Hamas carried out numerous cross-border rocket attacks in the past, and Israel launched a war in the Gaza Strip in late 2008 with the aim of ending such strikes.

Israel has held a country-wide civil defence exercise annually for the past three years and military officials said the current drill is the most extensive in its 62-year history.

Hezbollah rockets did cause significant casualties during the Lebanon war, and Israeli officials have said that since the conflict ended, the group has bolstered its arsenal with more powerful and longer-range weapons.

Rockets fired from the Gaza Strip have rarely caused fatalities in Israel and carry a relatively small warhead. But Hamas has said it now has rockets that can reach deep into Israel.

Israel embarked on its fourth annual home front drill at a time when Iranian-backed militants are rearming to Israel’s north and south, and Iran itself is suspected of developing nuclear arms, despite its denials.

The five-day exercise, the biggest in Israel’s history, has raised allegations by the country’s enemies that it is preparing for war — a concern Israel has sought to allay.

“We’re talking about a national defensive operation — defensive, not offensive,” Col. Hilik Sofer, a senior official with the military’s home front command, told Army Radio. “I wouldn’t want our home front to be caught like it was on the eve of the Lebanon war, unprepared, undrilled and untrained. I very much hope this drill won’t lead to anything.”

Israel began carrying out the annual exercise, code-named Turning Point, after its 2006 war with Hezbollahmilitants in Lebanon showed the country’s bomb shelters, air raid sirens and civil defense authorities were unprepared. The exercise also incorporates experience from Israel’s 2009 war against Palestinian militants in the Gaza Strip.

Israeli media reported that Hezbollah heightened its alert status ahead of what it branded Israel’s “war game.” And they quoted Lebanese Prime Minister Saad Hariri as saying the Israeli exercise defies peacemaking efforts.

Israel has tried to allay regional concerns with assurances through diplomatic channels that the drill is not a cover for a military strike, defense officials said.