TEHRAN (AFP) -Iran is set to respond to a deal aimed at ending a nuclear standoff but has already signalled it was likely to defy the international community and refuse to freeze sensitive atomic work.

Ayatollah Ali Khamenei, who has the last word on all key policy issues, said Iran was determined to press ahead with its nuclear programme despite an August 31 UN Security Council deadline to suspend uranium enrichment.

Officials said Iran would give a comprehensive response Tuesday to the package offered by world powers but wanted to address “ambiguities” over its right to nuclear technology under the Non-Proliferation Treaty.

It is due to deliver its response to representatives of the five permanent Security Council members plus Germany at 1230 GMT, a source in Tehran said.

But divisions were emerging among world powers, with the United States baying for sanctions while China said punishing Iran was not the way to resolve the long-running crisis.

“The Islamic republic has made up its mind and on the nuclear programme and other issues it will continue on its path with strength, with God’s help,” Khamenei was quoted as saying on state television Monday.

“Arrogant powers, led by the United States, are fearful of progress of Islamic countries in various dimensions,” he said.

“Therefore, in the nuclear issue, even though they know Iran is not seeking nuclear weapons, they are piling on the pressure to prevent our scientific progress as an Islamic country.”

The United States and its Israeli ally suspect the programme is a cover for an attempt to produce a bomb but Iran insists it is purely for peaceful electricty-generation purposes.

In a further indication Iran was set to ignore the international community’s demands, Atomic Energy Organisation deputy head Mohammad Saeedi said the suspension of uranium enrichment was “no longer possible.”

“The main ambiguity is that they have smartly avoided article four of the Non-Proliferation Treaty which affirms developing countries’right to expanding technology,” Saeedi told the semi-official Mehr news agency Tuesday.

The article stipulates the right of signatory states to benefit from the peaceful use of the atom and commits them to share nuclear equipment, materials and information for peaceful purposes.

The international proposal, drawn up by the so-called 5+1 — the five UN Security Council permanent members — Britain, China, France, Russia and the United States — plus Germany, was submitted to Tehran in June.

It offers trade and technology incentives in return for a freeze on enrichment and reprocessing activities, which can make the fuel for nuclear power stations or in extended form can produce the fissile core of an atom bomb.

With the threat of sanctions looming large, and bellicose warnings from the United States, Iran has been showing off its military muscle during war games this week to demonstrate its readiness to “respond to any threat.”

Saeedi also said Iran was also planning to start up a plant in the city of Arak to produce heavy water for a research reactor due for completion by 2009.

The UN atomic watchdog is concerned about the risk of diversion of nuclear materials as the reactor could produce 8-10 kilogrammes (about 20 pounds) of plutonium a year, enough to make at least two nuclear bombs.

US President George W. Bush said Washington would take the lead in demanding enforcement action by the Security Council if Iran’s response failed to provide the halt to nuclear fuel work.

“There must be consequences if people thumb their nose at the United Nations Security Council,” he said. “We will work with people on the Security Council to achieve that objective.”

But in a sign of a division among world powers, a senior Chinese official said Beijing opposed sanctions.

“We have all along stood for a peaceful settlement of the issue through negotiations, rather than resorting to force or threatening sanctions,” said Sun Bigan, China’s special envoy to the Middle East.

“Resorting to force and sanctions cannot fully solve the problems.”

UN Secretary General Kofi Annan has urged Iran to reply positively.

“I appeal to the government of Iran to seize this historic opportunity,” he said Sunday. “Iran’s reply will, I trust, be positive and that this will be the foundation for a final, negotiated settlement.”

But the markets took fright at the negative noises coming out of Iran, the OPEC oil cartel’s number two producer, which has threatened to halt exports to the West if the Security Council imposes sanctions.