Iran today moved closer to a potentially damaging showdown with Europe and the US as it began to remove protective seals from sensitive equipment at a controversial nuclear plant, paving the way for the production of enriched uranium.

The move, which will allow the mothballed facility on the outskirts of Isfahan to operate at full capacity, was confirmed by Tehran today as the 35 members of the International Atomic Energy Agency (IAEA) continued a series of crisis talks which could lead to economic sanctions against the Islamic republic.

Gholamreza Aghazadeh, the head of Iran’s atomic energy organisation, told state television: "The rest of the seals will be removed today and the [conversion] activities will resume."

Iranian officials began to personally remove the seals which were placed on machinery by the IAEA in November when Iran suspended conversion as a "goodwill gesture" during tortuous diplomatic talks.

This week work resumed in less sensitive, unsealed areas of the plant after the country rejecting a package of economic and political incentives from the EU3 to abandon its nuclear programme.

Throughout the current stand-off, it has emphasised that it is working in concert with the IAEA, whose inspectors are installing surveillance equipment to monitor the facility.

The conversion process is a key stage in the enrichment of uranium ore (yellowcake), transforming the natural substance into fuel for reactors or, if more highly converted, the explosive core of warheads and atom bombs.

Iran has been under investigation for more than two years by the IAEA, which has accused it of harbouring ambitions to launch a military nuclear programme behind the facade of a civilian nuclear programme.

President Mahmood Ahmadinejad, the newly-elected hard-liner, described Friday's offer of nuclear, commercial and political co-operation in exchange for a suspension of enrichment activities as an "insult".

"The Europeans talk as though the Iranian people were a backward people, as if they were still in the last century when they dominated our country," he said.

Although the stance against the unpopular governments of the West is a popular domestic move, Mr Ahmadinejad was careful to ensure the door to negotiations was not entirely closed. He has said that he will reveal Iran's proposals following the installation of his government.

President Bush, who has reluctantly allowed Britain, France and Germany to continue in its attempts to find a diplomatic resolution to the escalating crisis, last night said that he remained optimistic a negotiated agreement could still be reached to avoid the looming showdown.

The US has long advocated punishing Iran with sanctions if it refuses to abandon its nuclear programme. Mindful of its tarnished image in the Middle East, it has however strained to maintain international support.

Echoing the sentiment of his counterparts in the European Big Three, he said: "We’ll work with our friends on steps forward, on ways to deal with the Iranians if they choose to ignore the demands of the world."

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