President Bush gave warning last night that Iran’s pursuit of the atomic bomb could lead to a nuclear holocaust in the Middle East, and promised to confront Tehran “before it is too late”.

Mr Bush’s remarks, the starkest warning that he has made about Iran’s nuclear ambitions, came hours after President Ahmadinejad of Iran said that a power vacuum was imminent in Iraq and that Tehran was ready to fill it.

Mr Bush also talked for the first time of “two strains” of Islamic radicalism causing chaos in Iraq and the region: not only Sunni jihadists, about whom he has spoken often, but also “Shia extremism, supported and embodied by Iran’s Government”.

The comments displayed a new aggression towards Tehran, a day after President Sarkozy of France raised the prospect of airstrikes on Iran if the crisis over its nuclear ambitions could not be solved through diplomacy.

Mr Bush said: “Iran’s pursuit of technology that could lead to nuclear weapons threatens to put a region already known for instability and violence under the shadow of a nuclear holocaust.

“Iran’s actions threaten the security of nations everywhere, and the United States is rallying friends and allies to isolate Iran’s regime to impose economic sanctions. We will confront this danger before it is too late,” he told war veterans in Nevada.

Mr Bush has said repeatedly that he wants the Iran nuclear standoff to be resolved diplomatically.

There is, however, still debate within his Administration over the possibility of launching airstrikes should Iran continue to develop its nuclear capability.

Mr Ahmadinejad, in a news conference in Tehran, again denied that Iran was pursuing nuclear weapons, and dismissed any possibility of US military action against Iran. “Even if they were to decide to do so, they would be unable to carry it out,” he said.

He increased his provocation of Mr Bush, who accused Iran of arming insurgents with sophisticated roadside bombs that were killing US troops.

“The political power of the occupiers is collapsing rapidly,” Mr Ahmadinejad said. “Soon, we will see a huge power vacuum in the region. Of course, we are prepared to fill the gap.”

Although Mr Ahmadinejad revels in making provocative statements, his latest remarks will increase the fears in Washington and among its moderate Sunni allies in the region that an Iranian-dominated Iraq would trigger a regional war between Sunnis and Shias.

Mr Bush said that extremist forces would be emboldened if the US were driven out of Iraq, leaving Iran to pursue a nuclear weapon and set off an arms race.

“Iran could conclude that we were weak and could not stop them from gaining nuclear weapons,” Mr Bush said. On Iranian involvement in Iraq, he said: “I have authorised our military commanders in Iraq to confront Tehran’s murderous activities.”

Mr Bush’s speech was his second address on Iraq within a week and was part of a significant effort by the White House to prepare the ground for the progress report to Congress next month by General David Petraeus, the US ground commander.

General Petraeus is expected to ask for more time for the troop “surge” and Mr Bush still has enough votes on Capitol Hill to give it to him. The likelihood is that the current US troop levels in Iraq — about 160,000 — will remain until April. General Petraeus has signalled that he would then start to end the surge. However, the US is still likely to have about 130,000 troops in Iraq next summer.

Mr Bush told the American Legion Convention yesterday that he believed that the surge was working. He said that an agreement reached on Sunday by Sunni, Shia and Kurdish leaders in Baghdad to allow ex-Baathist members to get government jobs was evidence that political reconciliation was under way.

In reality, the agreement appeared to have achieved little because Iraq’s main Sunni leader said that it was too small an olive branch for him and his party to rejoin the Government of Nouri al-Maliki, the Iraqi President.

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