President Bush is planning to declare Iran’s most influential military force a terrorist organisation in an escalation of Washington’s stand-off with Tehran.

Condoleezza Rice, the US Secretary of State, is expected to announce in the coming weeks that the Iranian Revolutionary Guards Corps (IRGC) is a “designated global terrorist” force.

The move would place the 125,000-strong organisation alongside groups such as al-Qaeda, marking the first time that a branch of a foreign sovereign government has been designated a terrorist entity.

The IRGC, known in Iran as the Pasdaran, is one of the most powerful institutions in the country. It has its own army, navy and air force and has expanded its operations into industry and commerce. Dozens of senior officials and members of parliament served in its ranks during the Iran-Iraq War, among them the President,Mahmoud Ahmadinejad. By branding it a terrorist organisation, the US hopes to affect its £520 million business interests, which include energy, construction, pharmaceuticals and defence industries. While the US has no commercial ties with Iran, it would increase pressure on other countries not to trade with Tehran.

The move has been made in retaliation for the activities of the al-Quds Force, the military wing of the Revolutionary Guards, which has been accused of arming and training militant groups in Iraq, Lebanon and Afghanistan. Lieutenant-General Raymond Odierno, the US deputy commander in Iraq, said this month that Shia militants, supported by Iran and armed with explosives, were respons-ible for 73 per cent of the attacks that had killed or wounded US soldiers in Baghdad in July.

British commanders in southern Iraq blame the same forces for an escalation of attacks on British troops in Basra. IRGC naval units were respons-ible for seizing 15 British sailors and Marines in the Gulf in March. President Bush warned Tehran last week that “there will be a price to pay” if its agents continued to undermine US efforts in Iraq.

“My message to the Iranian people is, ‘You can do better than this current government. You don’t have to be isolated. You don’t have to be in a position where you can’t realise your full economic potential’, ” Mr Bush said.

Washington’s action is also partly a response to the failure of the UN Security Council to strengthen sanctions against Iran over its refusal to halt its nuclear programme. The matter is to be discussed next month at the annual UN General Assembly meeting, with Washington making clear that if diplomacy fails to prevent Iran building a nuclear weapon, it is prepared to use force against Tehran.

The escalation of the crisis could damage attempts at a rapprochement between the US and Iran. Diplomats recently held the second round of bilateral talks on security, the first official contact between the two countries since relations were broken in 1980.

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