Reuters reports:

Iran’s president gave instructions on Sunday for the production of higher-grade nuclear reactor fuel, prompting the United States and Germany to threaten carefully targeted new sanctions against Tehran.

President Mahmoud Ahmadinejad’s announcement raised the stakes in Iran’s dispute with the West, but he said talks were still possible on a nuclear swap offer by world powers designed to allay fears the Islamic Republic is making an atomic bomb.

U.S. Defense Secretary Robert Gates said the response by Iran, a major oil exporter which says its nuclear program is to make electricity and not bombs, was very disappointing.

Deutsche Welle added:

US Senator Joe Lieberman, who heads the Senate Committe on Homeland Security, told the German Press Agency dpa that the world faces a choice between imposing tough sanctions against Iran or launching a military strike.

Lieberman was the last speaker of the day on Saturday and obviously frustrated at the Iranian Foreign Minister’s late-night speech on Friday didn’t mince his words.

“We have a choice here: to go to tough economic sanctions to make diplomacy work or we will face the prospect of military action against Iran,” Lieberman said.

That is because a nuclear-armed Iran would create chaos in the Middle East, send oil prices soaring and shatter any hope of an end to the Israeli-Palestinian conflict, he said.

“They should just accept the existing (IAEA) proposal,” Lieberman told dpa.