Iran warned Wednesday of a fierce response and radically higher oil prices if the country was attacked, but also signalled possible progress in its five-year nuclear standoff with the West.

"Iran, if there were any kind of activity of any sort, is not going to be quiet and would react fiercely," Iranian Oil Minister Gholam Hossein Nozari said here when asked what Tehran would do in the event of an attack.

He added that oil prices, which have been driven to record levels partly because of fear about the loss of Iran's 4.0-million-barrel-a-day output, would rise radically if Israel or the US launched a military strike.

His comments on the sidelines of an oil conference here came as Foreign Minister Manouchehr Mottaki, speaking to US media, said that a "new process" was underway in the dispute about the country's nuclear programme.

The news was greeted with scepticism by Washington but more positively in Brussels where EU foreign policy chief Javier Solana described it as "interesting."

Six world powers last month came up with a solution for ending the crisis, offering technological incentives in exchange for Tehran suspending uranium enrichment, which the West fears could be used to make an atomic bomb.

Iran has unveiled its own package, which is a more all-embracing effort to solve global problems and notably suggests the setting up of a consortium in Iran for enriching uranium.

"A process is underway and it started with the package delivered by Iran," Mottaki said in an interview with US media in New York, according to the state-run IRNA news agency.

"This package tackled important questions and then on the other side the world powers offered their own package," he said.

There has been a surge in speculation recently that Israel might be planning a military strike against Iran's nuclear sites after it emerged that Israel fighter planes had carried out practice runs.

But recent reports in Western media have also suggested that Tehran is ready to adopt a softer line in the standoff and may be prepared to offer concessions to break the deadlock.

The foreign policy advisor to supreme leader Ayatollah Ali Khamenei said on Tuesday it would be in Iran's interest to accept the package and warned against provocative remarks that could destabilise the situation.

The White House said Wednesday that it was sceptical about Mottaki's comments and President George W. Bush again stressed that military action was possible despite his preference for diplomacy.

"I have always said that all options are on the table but the first option for the United States is to solve this problem diplomatically," Bush told reporters in the White House Rose Garden.

Top US military chiefs said Wednesday that opening up a third front against Iran in addition to Iraq and Afghanistan would be "extremely stressful."

No Iranian official has suggested in the past months that Tehran is ready to give any ground on the key question of enrichment, which Iran must suspend in order to enter the talks offered by the world powers.

President Mahmoud Ahmadinejad had repeatedly vowed that Iran will never halt enrichment operations and Khamenei himself has said many times over the past years that Tehran will not back down.

Iran insists its atomic drive is entirely peaceful and it needs nuclear energy for a growing population whose fossil fuels will eventually run out.

The United States and its regional ally Israel have never ruled out military strikes to end what they see as Tehran's defiance,

After warning of Iran's response to any aggression, Oil Minister Nozari stressed that the country, the fourth-biggest oil producer in the world, was a "reliable source of supply to the market and Iran remains a supplier forever."

Analysts fear that Iran would cease crude exports and could block key Gulf oil shipping routes if attacked.

"When just a statement (about a possible attack) makes this much volatility in the market, can you imagine that if any action happens ... what would be the result in the oil market?" he said through a translator at an industry event here.

Benchmark oil prices traded at about 141 dollars per barrel in London and New York on Wednesday after striking a record above 143 dollars last week

The comments, made at the World Petroleum Congress industry event, followed signs of growing tension between crude producing and consuming countries over who is to blame for record crude prices.

burs-adp/wdb/gh