Bloody clashes broke out in Tehran yesterday as Iran's supreme leader said he would not yield to pressure over the disputed election. The renewed confrontation took place in Baharestan Square, near parliament, where hundreds of protesters faced off against several thousand riot police and other security personnel.

Witnesses likened the scene to a ­war zone, with helicopters hovering overhead, many arrests and the police beating demonstrators.

One woman told CNN that hundreds of unidentified men armed with clubs had emerged from a mosque to confront the protesters.

"They beat a woman so savagely that she was drenched in blood and her husband fainted. They were beating people like hell. It was a massacre," she said.

The opposition website Rooz Online carried what it said was an interview with a man the government had shipped in to Tehran to quell the demonstrations. He said he was being paid 2m rial (£122) per day to assault protesters with a heavy wooden stave, and that other volunteers, most of them from far-flung provinces, were being kept in hostel accommodation, reportedly in east Tehran.

With the independent media banned from covering street protests, the reports could not be verified.

There were also unconfirmed reports tonight that Zahra Rahnavard, the wife of opposition candidate Mir Hossein Mousavi, had been arrested. Earlier in the day she had called on the authorities to release Iranians who had been detained.

In remarks posted on her husband's website, Rahnavard said: "I regret the arrest of many politicians and people and want their immediate release. It is my duty to continue legal protests to preserve Iranian rights."

Rahnavard, who galvanised women voters by campaigning at Mousavi's side before the election, said the government should not treat his supporters "as if martial law has been imposed in the streets".

Meantime, the Foreign Office is investigating claims that Britons have been arrested in connection with the protests. There were reports on Iranian state television that some British passport-holders had been detained following the unrest.

A spokesman for the Foreign Office said: "We are aware of the reports and we will be looking into them."

The latest confrontations came as the country's supreme leader, Ayatollah Ali Khamenei, whose authority has been challenged by massive grassroots protests, said on state television: "I had insisted and will insist on implementing the law on the election issue. Neither the establishment nor the nation will yield to pressure at any cost."

But one of the defeated presidential candidates, Mehdi Karroubi, stepped up his challenge to the regime, describing the government as illegitimate. Rejecting the outcome of the 12 June vote, Karroubi – a reformist cleric and the most liberal of the presidential candidates – said on his website: "I do not accept the result and therefore consider as illegitimate the new government. Because of the irregularities, the vote should be annulled."

Iran's guardian council has ruled out an annulment of the election, saying there were no major irregularities, although it admitted that more people had voted than were registered in 50 areas. It was announced yesterday that Ahmadinejad would be sworn in by mid-August.

Iran has accused the US and Britain of stirring up trouble in post-election violence that has seen at least 17 people killed, although the toll is suspected to be higher. Britain yesterday expelled two Iranian diplomats in a tit-for-tat response to the expulsion of two British diplomats accused by Tehran of being spies.

Iran's foreign minister, Manouchehr Mottaki, said his government was considering downgrading diplomatic relations with the UK. Mottaki was asked about calls from members of Iran's parliament to scale down Iranian representation in the UK, possibly withdrawing its ambassador. "We are studying it," he said, according to state television.

"There has been an absence of any hostile activity. There hasn't been another escalation, and there haven't been any more demos [outside the Iranian embassy in London] that we're aware of," he said.

However, Iran's intelligence minister, Gholamhossein Mohsen-Ezhei, said that "a number people holding British passports had been arrested during the recent arrests," according to Iranian state radio.

Mottaki had earlier claimed that there had been an increase in the number of visas issued to visitors from Britain in the immediate run-up to the election, although did not make clear if the visas were issued to journalists.

The US withdrew invitations to Iranian diplomats to attend the US independence day celebrations on 4 July, to protest at the crackdown.

On Tuesday, after a week of reticence, US president Barack Obama condemned for the first time the violence in Iran, saying: "The United States and the international community have been appalled and outraged by the threats, beatings, and imprisonments of the last few days. I strongly condemn these unjust actions, and I join with the American people in mourning each and every innocent life that is lost."