Iran moved a step closer to nuclear weapons capability yesterday after notifying the UN that it would begin enriching its existing nuclear fuel stockpile towards weapons grade.

The move caused international alarm and renewed Western calls for new sanctions on Tehran despite opposition from China, which insists that negotiations could still succeed.

Iran’s announcement is the latest twist of the UN-backed uranium swap deal. Iran was required to ship out three quarters of its low-enriched uranium stocks — at a purity of 3.5 per cent — in return for an equivalent amount of 20 per cent enriched uranium in the form of French-made fuel rods to be used in a research reactor to produce medical isotopes.

Iran in effect pronounced the deal dead yesterday, telling the International Atomic Energy Agency (IAEA) that it would begin the high-enrichment itself, taking it closer to the 90 per cent weapons-grade uranium required for a nuclear bomb.

Because it lacks the technology to make the fuel rods Iran could not use the enriched material for medical purposes, raising suspicions that it is seeking to produce weapons-grade fuel.

France and Argentina are the only countries capable of making the rods and Argentina has refused to help.

Although weapons-grade uranium is 90 per cent enriched the first stages of the process are by far the hardest. The leap from 20 to 90 per cent is bridged easily. Bernard Kouchner, the French Foreign Minister, denounced Iran’s move as blackmail to force a deal on Tehran’s terms. The Foreign Office called the Iranian decision worrying.

President Ahmadinejad announced last week that Iran was ready to sign the deal. The announcement was met with scepticism and ultimately failed because of the refusal by Iran to adhere to the conditions put forward by the IAEA.

The battle now moves to the UN Security Council where Western powers hope to lure Russia and China on board for sanctions on the Iranian Central Bank and other financial institutions, as well as companies controlled by the elite Revolutionary Guard.

Mr Kouchner appeared downbeat about the chances of a swift resolution, saying that China had yet to be persuaded to sign up.

Russia, which previously opposed sanctions, has shown signs of softening. Yesterday the Kremlin urged Iran to agree to the deal and send its uranium abroad immediately to break the impasse.

Robert Gates, the US Defence Secretary, said that the point of sanctions was to pressure Iran back to the negotiating table and warned of the consequences of failing to do so.

“We have to face the reality that if Iran continues and develops nuclear weapons it almost certainly will provoke nuclear proliferation in the Middle East,” he said. “This is a huge danger.”