It is clear that the Bush administration's policy of sanctions and tacit threat of war toward Iran has lost all credibility. This became evident as soon as the National Intelligence Estimate released this month contradicted the White House depiction of the Iranian threat.

But the report isn't a total win for Iran. Though it has nullified the threat of war and will embolden Iran in its march toward nuclear self-sufficiency, it may also undermine the presidency of Mahmoud Ahmadinejad, who thrives on international crisis and tension.

President Bush may take comfort in his rhetoric that nothing has changed. Yet, since the release of the NIE, everything has changed. A single intelligence report has done what all of Iran's protestations could not: It subverted America's coercive policy. The facts that the weapon design research has been suspended, and that the claim of an imminent threat was exaggerated, have undermined the administration's case for war at home and abroad. They have even dashed its hope of isolating the Islamic republic: Russia and China are resisting new UN sanctions, and some of America's European allies may soon relax financial restrictions they agreed on to avert war with Iran.

To add to US concerns, a careful reading of the report indicates that Iran has seemingly suspended the weaponization aspect of its program but is still constructing an elaborate enrichment infrastructure – one that will give it the option to construct a bomb in the not-too-distant future.

Because the theocratic regime now feels immune from military retribution and is confronting a fragmented international community, it is likely to be fortified in its efforts to complete the fuel cycle. Meanwhile, Iran is cooperating with inspectors at the International Atomic Energy Agency and is judged by the CIA to have suspended critical components of its nuclear network. It has no reason to cease any of its activities.

But inside Iran, the NIE may have a negative effect. The silver lining of the report may well be the weakening of Mr. Ahmadinejad and his politics of defiance. The president might celebrate the report's findings as a victory for Iran, but he can not take credit for it. Nor will it in all likelihood favor him in his ongoing tug-of-war with political rivals. It is not Ahmadinejad's hard-line rhetoric and uncompromising posture in negotiations that are to credit for the change in Iran's fortunes. Rather, they come from a decision to halt the nuclear weapons program that Supreme Leader Ayatollah Ali Khamenei blessed in 2003, when reformists were in charge.

With war no longer imminent, the supreme leader may see less value in Ahmadinejad's confrontational politics. And he, not the president, has the last word in foreign policy matters.

Parliamentary elections are scheduled for March. Much rides on the outcome. It can either give Ahmadinejad momentum going into the presidential elections in 2009 or turn him into a lame duck. His international grandstanding not withstanding, Ahmadinejad's presidency is in trouble. His faction lost in the December 2006 elections for municipal councils and the Council of Experts that will choose the supreme leader's successor. Since then, popular discontent with his administration has continued to grow. This week, former president Mohammad Khatami publicly criticized the president at the prominent Tehran University, whose students protested Ahmadinejad in September. In a recent poll, two-thirds of those who had voted for him in 2005 indicated that they will not vote for him again.

Ahmadinejad's populist rhetoric and confrontational style are popular in some quarters in Iran, but they do not override the growing disaffection with political suppression and economic mismanagement. While the climate of fear has not sat well with voters, Ahmadinejad has even more to worry about from the fallout of Iran's faltering economy. With oil at more than $90 a barrel, Iranian financial reserves look good. But the Iranian economy is struggling: Capital markets are in shambles, investment at rock bottom, and flight of capital an ongoing concern.

Meanwhile, populist policies have raised inflation, impoverishing the middle class without doing much for the poor. Noisy labor unrest has become more frequent across the country, and there has been worry over a spike in crime.

So far, Ahmadinejad has successfully used the threat of war to suppress dissent and divert attention from domestic woes to international crises he is only too happy to fuel. He has accused rivals of espionage and collaboration with the enemy. He has blamed economic hardships on sanctions – which he expects Iranians would be willing to endure in a climate of war.

But as a result of the NIE, Iranians may conclude that there will be no war, no new sanctions, and perhaps even a relaxation of financial restrictions. And they may begin to put up with less and demand more from their government. Iranians supported Ahmadinejad when it looked like the US was gunning for war, but they will probably not support their president if it turns out he is the one looking for trouble. They want prosperity and stability and will take Ahmadinejad to task for the failures of his administration, unfulfilled expectations, inflation, unemployment, and suppression.

At first glance, the NIE appears to have undermined the Bush administration's hard-line approach toward Iran. But the irony is that Washington now has the ability to further undermine Ahmadinejad while regulating Iran's nuclear program through diplomacy and dialogue. Suddenly, Washington may be facing a Tehran that is unyielding on its nuclear prerogatives but is also more pragmatic.

The US should seize the moment with an offer of comprehensive negotiations between the two countries and the prospect of rapprochement. These carrots will not just diminish the power of hardliners such as Ahmadinejad; it will also provide a mechanism to ensure that Iran complies with its nonproliferation commitments.

• Vali Nasr is a professor at the Fletcher School of Law and Diplomacy at Tufts University and the author of "The Shia Revival: How Conflicts within Islam will Shape the Future." Ray Takeyh is a senior fellow at the Council on Foreign Relations and the author of "Hidden Iran: Paradox and Power in the Islamic Republic."