TEHRAN (Reuters) - Iran said on Tuesday new sanctions imposed on it by the European Union over its nuclear plans could hurt diplomatic efforts to resolve the row.

Iranian President Mahmoud Ahmadinejad looks towards Iran's Defence Minister Mostafa Mohammad Najjar during a news conference in Tehran, April 4, 2007. REUTERS/Morteza Nikoubazl

The standoff between the West and the Islamic state has sparked fears of a military confrontation that would disrupt oil supplies. Last week a U.S. newspaper report said Israel had practiced for a possible strike against Iran’s nuclear sites.

But a senior Iranian official denied rumors on Tuesday of an Israeli attack on his country, which sent stocks lower and oil prices higher.

“No attack against Iran’s nuclear facilities has taken place,” the official said. In Jerusalem, an Israeli army spokesman said: “We are not aware of any such incident in Iran.”

Israel, widely believed to have the Middle East’s only atomic arsenal, has described Iran’s nuclear program as a threat to its existence.

Following the market rumor, commander-in-chief of Iran’s elite Revolutionary Guards Corps Mohammad Ali Jafari warned the “enemy” over the consequences of any attack on Iran.

“If the enemy makes a strategic mistake (by attacking), the Revolutionary Guards are fully prepared to give a severe answer to the enemy,” the official IRNA news agency quoted him as saying.

The Corps is in charge of Iran’s most advanced missile systems like the Shahab-3 with a range of 2,000 km (1,250 miles), which analysts say can reach Israel.

Western powers suspect Iran, the world’s fourth-largest oil exporter, wants to make nuclear arms but Tehran denies this.

On Monday, the 27-nation EU agreed new punitive measures targeting businesses and individuals the West says are linked to Iran’s nuclear and ballistic programs.

The latest sanctions include an asset freeze on the largest bank, Bank Melli, and visa bans on senior officials like the Revolutionary Guards’ chief Jafari, Defense Minister Mostafa Mohammad Najjar and Gholamreza Aghazadeh, Iran’s top atomic official.

Foreign Ministry spokesman Mohammad Ali Hosseini condemned the move by the EU, still an important economic partner for Tehran even if trade volumes have declined, as “illegal” and made clear it would not slow Iran’s nuclear activities.

OIL WINDFALL

Hosseini said the sanctions would strengthen the determination of Iranians “to establish their obvious rights and will not help to create an appropriate atmosphere to resolve the issue through diplomatic channels”.

He was referring to separate proposals put forward by Iran and by six world powers intended to defuse the dispute that has helped push up oil prices to record highs.

EU foreign policy chief Javier Solana handed Iran an offer on June 14 of economic and other benefits proposed by the United States, Russia, China, Britain, Germany and France to try to convince it to halt uranium enrichment.

Iranian officials have repeatedly ruled out suspending enrichment, which can have both civilian and military uses.

Their refusal to do so has drawn three rounds of limited U.N. sanctions since 2006 and Western powers have warned of more such measures if Iran rejects the latest offer.

Iran has put forward its own package of proposals aimed at resolving the row, but diplomats say it ignores global concern about its enrichment program.

Analysts say Western companies are becoming more wary of investing in Iran even though its windfall crude export earnings, which its oil minister estimates at $6 billion per month, are helping it to cushion the sanctions impact.

President Mahmoud Ahmadinejad, widely expected to stand for re-election in 2009, is also under increased political pressure at home for failing to rein in annual inflation of 25 percent.

The United States, which has also imposed sanctions on Iran beyond the U.N. resolutions, says it is focusing on diplomatic pressure to thwart Tehran’s nuclear plans but has not ruled out military action as a last resort.

On Friday, The New York Times quoted U.S. officials as saying Israel had carried out a large military exercise, apparently a rehearsal for a potential bombing of Iran’s nuclear facilities.