"We wish to caution the great powers against further interference in the region and against the exacerbation of the flames of war," Mr Khatami said during a visit to Malaysia. "We live in a very frightening situation today. We have never witnessed war being so much promoted in the US."

Iran's leadership would not bow to US "threats and insults", he said.

In a pointed reference to US hopes to depose Saddam Hussein and impose "regime change" in Iraq, Mr Khatami said that any such action could destabilise the entire region, with unpredictable results.

"No one has the right to decide for the people of Iraq. The people of Iraq should decide for themselves," he said. Tehran's own disputes with Baghdad notwithstanding, "we condemn any foreign interference in Iraq".

In a measure of how sharply US-Iranian relations have deteriorated in recent months, he also accused Washington of colluding with Israel in a policy of "genocide" against the Palestinians.

Mr Khatami's remarks raised the possibility that a US military attack on Iraq could trigger a regional conflagration, drawing in Iran and possibly even Israel, Iran's sworn enemy.

The reformist Iranian leader, who is engaged in a long-running battle at home with conservative opponents, spoke as officials in Washington suggested a significant hardening of US policy on Iran.

The officials indicated that the Bush administration has decided to drop the policy of engagement supported by Britain, the EU and former US president Bill Clinton, and instead adopt a more confrontational approach, including open encouragement of anti-government forces in Iran.

Mr Khatami and his pro-reform supporters in government "are too weak, ineffective and not serious about delivering on their promises", one official told the Washington Post. "We have made a conscious decision to associate with the aspirations of the Iranian people."

Earlier this month, George Bush appealed to ordinary Iranians, suggesting that they were, in effect, being held hostage by the country's Shi'ite clerical establishment. He also accused Iranian leaders of corruption.

"In the last two Iranian presidential elections... the vast majority of the Iranian people voted for political and economic reform," Mr Bush stated. "Yet their voices are not being listened to by the unelected people who are the real rulers of Iran.

"Uncompromising, destructive policies have persisted... Meanwhile, members of the ruling regime and their families continue to obstruct reform while reaping unfair benefits. Iran's people... have no better friend than the United States of America," Mr Bush said.

His statement was conveyed directly to Iran via the government-funded Voice of America radio station.

Iran's supreme spiritual leader, Ayatollah Ali Khamenei, issued a fierce response: "America has spread the shadow of war and death in the region, threatening officially to overthrow the people and government of Iran," he said last week. "The great Iranian nation will not retreat."

The US policy shift concludes a process begun last January when Mr Bush labelled Iran a "rogue state" linked to terrorism and a part of the "axis of evil" that includes Iraq and North Korea. Mr Bush also accuses Tehran of seeking to acquire weapons of mass destruction.

The tougher US position puts it at odds with Britain and the EU, which favour "critical engagement" with Iran, in the hope of encouraging reform, and have been negotiating a trade pact with Tehran. The foreign secretary, Jack Straw, has visited Tehran and a German government delegation is due there next month.

"We believe engaging with the reformers is the best way forward and we still do," a Foreign Office source said last night.

Mr Bush's statement, issued on July 12, caused anger and astonishment inside Iran, dismaying reformists who have been struggling against a growing conservative backlash and provoking anti-American demonstrations.

US analysts interpreted Washington's harder line as another setback for the secretary of state, Colin Powell, and an advance for hawks within the national security council and the Pentagon.