The White House warned Iran last night that military action is still one of its options despite the "hand of friendship" offered by President Obama.

Officials moved to cool fevered expectations - and assuage lingering European concerns - about plans to thaw a 30 year freeze in US relations.

Robert Gibbs, the White House press secretary, reiterated that any talks held with the Iranian leadership would not necessarily be with President Ahmadinejad and would involve careful preparations beforehand.

Asked if the use of force was still possible, he replied: "The President hasn't changed his viewpoint that he should preserve all his options." Mr Gibbs added that the US needed to address Iran's sponsorship of terrorism and its threats against Israel, as well as an "illicit nuclear programme".

The first step towards re-engagement will be taken next week when William Burns, an undersecretary at the State Department, meets representatives from Britain, France, Germany, China and Russia - the so-called "P5 plus one" group set up to halt Iran's uranium enrichment activities.

In a sign of the sensitivity towards plans for a diplomatic overture towards Iran, Mr Gibbs denied reports yesterday claiming a letter to Mr Ahmadinejad had already been written. "Neither the President nor the Secretary of State has requested or seen any such letter," he said.

Some European diplomats have voiced concerns that Mr Obama might abandon the existing strategy of offering carrots and sticks through the United Nations security council in favour of direct negotiations with the Iranian leadership.

Countries such as Germany have lost billions of dollars in trade by tightening sanctions against Iran and want to ensure that these efforts do not go to waste. Others are cautioning Mr Obama about moving too fast in forming a relationship with a notoriously untrustworthy regime.

In a leaked Foreign Office letter last year, Sir Nigel Sheinwald, Britain's Ambassador in Washington raised questions about how Mr Obama's "desire for ‘unconditional’ dialogue with Iran" squared with the international community's long-standing "requirement of prior suspension of enrichment before the nuclear negotiations can begin”.

But Susan Rice, the new US Ambassador to the United Nations, emphasised this week that while Mr Obama was prepared to engage in "vigorous" direct diplomacy, he also wanted "continued collaboration and partnership with the P-5 plus one".

One European official said today: "If the US oil companies were getting lucrative contracts with Iran that would go down badly. But the idea that it will all suddenly be peace and love between Washington and Tehran is for the birds."

Although there is a consensus that this will be a critical year, with Iran expected to pass the threshold of having enriched enough uranium to build an atomic bomb, there is disagreement about how to proceed.

France is said to be pushing for stronger EU sanctions while Germany prefers to wait for agreement with the UN Security Council, to ensure that Russia and China are on board.

At the World Economic Forum in Davos yesterdayay, Iranian Foreign Minister Manouchehr Mottaki said if Mr Obama really changed policy "not in saying but in practice" he would find "a co-operative approach".

A later exchange with Tony Blair, the Middle East peace envoy, however indicated some of the perils of negotiating with Iran. The former British Prime Minister asked if Iran would accept a Palestinian agreement on a two-state solution with Israel. When Mr Mottaki evaded answering, Mr Blair said: “My hair is not all grey yet. If you’d just say - then it would keep my hair brown.”

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