A series of strategic errors by the Bush Administration in its War on Terror has left Iran holding virtually all the cards in the power play of the Middle East, according to a report by Britain's most influential think-tank published today.

The report from the Royal Institute of International Affairs at Chatham House - entitled Iran, its neighbours and the regional crises - paints a bleak picture of the prospects for the United States and its Western allies as they try to put a cap on Iran's nuclear programme.

It describes Iran as a state that sits with "confident ease" in the region and says, crucially, that Iran has replaced the United States as the most influential power in Iraq, able to influence events on the street and not just behind the security barricades of Baghdad's Green Zone.

"There is little doubt that Iran has been the chief beneficiary of the War on Terror in the Middle East," says the report from Chatham House's Middle East Programme.

"The United States, with coalition support, has eliminated two of Iran’s regional rival governments - the Taleban in Afghanistan in November 2001 and Saddam Hussein’s regime in Iraq in April 2003 - but has failed to replace either with coherent and stable political structures."

The Chatham House experts wrote that their original report was to analyse Iran's regional influence in the context of international efforts to prevent it developing nuclear weapons.

Its scope was also to encompass the complexities of Iranian domestic politics and the clash between the "apocalyptic world-view" of President Ahmadinejad and the more pragmatic, conservative Supreme Leader, Ayatollah Ali Khamenei.

But as the conflicts grew in Gaza and the Lebanon, where Iran is the key backer of the Hezbollah militia, the 50-page report was expanded to consider all other inter-connected regional crises.

"A recurring theme is the desire of most states to maintain good relations with Iran or, where the relationship is less strong, to avoid antagonisation or any further deterioration," the report says.

"There exist a variety of reasons for this which have generally been strengthened by the turmoil in Afghanistan, Iraq, Palestine and Lebanon. Iran is in a powerful regional position and its co-operation and positive influence are needed to douse the many fires currently alight.

"Were Iran to feel seriously threatened by outside forces, it does have the potential to inflame the region yet further."

The Chatham House report was published the day after Iran delivered its formal response to a UN Security Council resolution offering a range of incentives if it agrees to end enrichment of uranium, which can be used to fuel nuclear power stations or produce atomic warheads. The resolution holds the threat of sanctions against Iran if it refuses to do so.

Diplomats close to the discussions said that the Iranian response, as expected, was neither a "yes" or "no" answer. Instead, Iran has proposed further talks, without explicitly rejecting the UN demands.

Although President Bush has said that he intends to find a diplomatic solution to the crisis, he has repeatedly said that no option is off the table, including that of military action against Iranian nuclear facilities.

On that score, the Chatham House analysis will make uncomfortable reading for White House planners.

"If the US were to attack Iran, then it would do so knowing that its forces in Iraq would be at an even greater risk than they currently are. Any US attack against Tehran would expose the US presence in Iraq to retaliatory destabilising interventions by Tehran," the report says.

"Washington's biggest security headache, as it considers whether to embark upon an assault against the Islamic Republic, is neither Iran's ability to fight in the airspace, nor even in the streets of its border towns (if the US were indeed to surprise most analysts and attempt a land invasion). The greatest threat to the US is Iran's ability to further destabilise the already chaotic public spaces of Iraq."

The report adds: "The great problem facing the US is that Iran has superseded it as the most influential power in Iraq. This influence has a variety of forms but all can be turned against the US presence in Iraq with relative ease, and almost certainly would heighten US casualties to the point where a continued presence might not be tenable."

Such a destabilisation, the analysts say, would have profound implications for the British contingent serving in Basra, Iraq's southern oil capital, where there is a "turf war" between Shia Muslim parties and militias, backed by Iran.

Chatham House says that both the Supreme Council for Islamic Revolution in Iraq (SCIRI), the former exile group founded in Tehran in 1982 during the Iran-Iraq war, and the Iranian-trained Badr Army are making "considerable political gains" in Basra.

SCIRI, it says, backs an expansive "Region of the Centre and the South", a kind of super-province including Basra and the two Shia Muslim holy cities of Najaf and Karbala.

"This scenario is probably of most interest to the geopolitically-savvy Iranians, and SCIRI's increasing prominence almost certainly comes hand in hand with enhanced Iranian support," the report says.

"From the perspective of Iran, SCIRI is also the most "controllable" of the Iraqi Shia parties, especially when compared with the Sadr Movement, or Fadilah. Maintaining influence in Iran's backyard of southern Iraq is of paramount importance to Tehran."

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