A senior US military official said on Friday Iran had become the biggest threat to the United States and Israel's president said the military option to stop the Islamic republic from obtaining nuclear weapons was nearer.

In Tehran, thousands of students burned US flags and pictures of President Barack Obama in a rally marking the anniversary of the 1979 seizure of the US Embassy.

Both sides have stepped up their rhetoric before the expected release next week of a report by the UN atomic watchdog.

Sources briefed on the document said it would support allegations that Iran built a large steel container for carrying out tests with high explosives that could be used in nuclear weapons.

'The biggest threat to the United States and to our interests and to our friends has come into focus and it's Iran,' said the US military official, addressing a forum in Washington. Reporters were allowed to cover the event on condition the official not be identified.

The official said he did not believe Iran wanted to provoke a conflict and that he did not know if the Islamic state had decided to build a nuclear weapon.

In Israel, President Shimon Peres was asked by Channel Two News if events were moving toward to a military option rather than a diplomatic one.

He replied: 'I believe so, I estimate that intelligence services of all these countries are looking at the ticking clock, warning leaders that there is not much time left.'

French President Nicolas Sarkozy, speaking at a G20 summit of world leaders in France, said: 'Iran's behavior and this obsessional desire to acquire nuclear military (capability) is in violation of all international rules. If Israel's existence were threatened, France would not stand idly by.

Iran's Islamic rulers, who say Israel has no right to exist, deny Tehran is seeking nuclear weapons and have warned they will respond to any attacks by striking at Israel and US interests in the Gulf.

Both the US and Israel, which is widely believed to have the Middle East's only nuclear arsenal, have repeatedly said they keep all options - including military attack - open in their effort to stop Iran from becoming a nuclear power.

But while speculation about an impending attack on Iran's nuclear facilities has heated up and cooled down several times in recent years, the thrust of the US policy on Iran has been exerting economic pressure via sanctions imposed by the United Nations and other bodies.

That stance was reiterated on Friday by Pentagon spokesman George Little, who said, 'In terms of the instruments of national power that we're currently employing, the focus is on diplomatic and economic.'

China, which along with Russia has only reluctantly supported U.N. Security Council sanctions against Iran, said it opposed the threat of force, but urged Iran to show flexibility over its nuclear program.

Analysts say Iran, a major oil exporter itself, could retaliate to any attack by closing the Strait of Hormuz, the waterway where about 40 per cent of all traded oil passes - likely spiking crude oil prices and delivering a significant blow to the weak global economy.-Reuters