President Mahmoud Ahmadinejad on Thursday accused the West of stirring up a "fuss" about Iran's nuclear programme, as reports said Washington has backed down from harsh sanctions against Tehran.

Ahmadinejad's latest outburst came a day after senior officials of the group of six major world powers dealing with Iran's nuclear programme held a conference call to discuss sanctions against the Islamic republic.

"They are saying we are worried that Iran may be building a bomb. But we are saying you have built it and even used it. So who should be worried?" Ahmadinejad said.

"They are just making a fuss. They have ended up humiliating themselves," he said in a speech at the inauguration of a new dam in southwest Iran that was broadcast on state television.

Western powers suspect Tehran is making a nuclear bomb under the guise of a civilian nuclear programme.

But Iran, which has steadfastly pursued nuclear technology under Ahmadinejad's presidency, denies these accusations, saying the goal is to generate electricity.

The hardline president said the Western powers were purely interested in stopping his country's overall progress.

"Let me tell you, the era when they could hurt the Iranian nation is over. The Iranian nation is at such a height that their evil hands can't touch it," Ahmadinejad said.

"They want to stop, even for an hour, the fast speeding train of Iranian progress. But they will be unable to do it," he said, adding Western countries were in decline and "humiliated by the Zionists."

Israel, the Middle East's sole but undeclared nuclear weapons power, and the United States have not ruled out using military strikes against Iran's atomic sites.

Israel, which has repeatedly come under Ahmadinejad's verbal attacks, has consistently urged world powers to swiftly impose harsh sanctions against Iran.

But senior officials from the United States, Russia, France, Britain, China -- the five veto-wielding powers of the UN Security Council -- and Germany failed to agree on sanctions in a conference call on Wednesday.

While the United States, Britain and France agree on the need for tough new measures, Russia and particularly China have been more reluctant to sign off on new sanctions.

China, Iran's main economic partner which for weeks stalled on holding the talks, appealed for more diplomacy to resolve the crisis on Thursday.

"China urges all sides to use diplomatic means to peacefully resolve the Iranian nuclear issue... this is the best choice," foreign ministry spokesman Qin Gang told reporters in Beijing.

The Wall Street Journal reported Thursday that, in order to get Russia and China firmly on board, Washington was no longer pushing for harsh measures which would have effectively closed international airspace and waters to Iran's state-owned air cargo and shipping lines.

The report said the proposed package of sanctions had also been stripped of plans targeting insurance for certain Iranian companies and the sale of Iranian bonds.

The Journal said the revised sanctions would more narrowly target "major power centers in Iran, in particular the Islamic Revolutionary Guard Corps," and would firm up existing pressure on Tehran.

The watered down version sought to enforce existing sanctions on cargo shipments, urged the United States to take additional steps to bar insurance provision and called for "vigilance" in transactions involving Iran.

Washington had hoped to get a new round of UN sanctions passed early this year, possibly around April, the newspaper said, but difficulty securing support could push the effort back into the summer.

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