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Even Iran's top trading partner China - which has refused to back new global sanctions against Iran - is demanding discounts to buy Iranian oil as Tehran's options narrow. Beijing has cut its imports of Iranian crude by more than half for January.

Experts still say they do not expect Tehran to charge headlong into an act of war - the U.S. Navy is overwhelmingly more powerful than Iran's sea forces - but Iran is running out of diplomatic room to avert a confrontation.

"I think we should be very worried because the diplomacy that should accompany this rise in tension seems to be lacking on both sides," said Richard Dalton, former British ambassador to Iran and now an associate fellow at Chatham House think tank.

"I don't believe either side wants a war to start. I think the Iranians will be aware that if they block the Strait or attack a U.S. ship, they will be the losers. Nor do I think that the U.S. wants to use its military might other than as a means of pressure. However, in a state of heightened emotion on both sides, we are in a dangerous situation."

The new U.S. sanctions law, if implemented fully, would make it impossible for many refineries to pay Iran for crude. It takes effect gradually and lets Obama grant waivers to prevent an oil price shock, so its precise impact is hard to gauge.

The European Union is expected to consider new measures by the end of this month. The sanctions would halt purchase of Iranian oil by EU members such as crisis-hit Greece, which has relied on easy financing terms offered by Tehran to buy crude.

Although China, India and other countries are unlikely to sign up to any oil embargo, tighter Western sanctions mean such customers will be able to insist on deeper discounts for Iranian oil, reducing Tehran's income.

Beijing has already been driving a hard bargain. China, which bought 11 percent of its oil from Iran during the first 11 months of last year, has cut its January purchase by about 285,000 barrels per day, more than half of the close to 550,000 bpd that it bought through a 2011 contract.The impact of falling government income from oil sales can be felt on the streets in Iran in soaring prices for state subsidised goods and a collapse of the rial currency.

"The rate is changing every second ... We are not taking in any rials to change to dollars or any other foreign currency," said Hamid Bakshi at an exchange office in central Tehran.

The economic impact is being felt ahead of a nationwide parliamentary election on March 2, the first vote since a disputed 2009 presidential election that brought tens of thousands of Iranian demonstrators into the streets.

In a sign of political tension among Iran's elite, a court jailed the daughter of powerful former President Akbar Hashemi Rafsanjani on Tuesday for "anti-state propaganda."Rafsanjani sided with reformists during the 2009 protests. Daughter Faezeh Hashemi Rafsanjani went on trial last month on charges of "campaigning against the Islamic establishment."

reports last week in China's state-controlled media and online military websites suggested that the first of a new class of a stealthy littoral combat frigate, the type 056, had been launched at Shanghai's Hudong shipyard with three others under construction.Naval analysts said the new 1,700-tonne ship, armed with a 76mm main gun, missiles and anti-submarine torpedoes, would be ideal for patrolling the South China Sea.These new warships would easily outgun the warships of rival claimants, they said.

"Make no mistake, in a steady, deliberate and sustainable way, the United States military is rebalancing and bringing an enhanced capability development to this vital region," Panetta told the Shangri-La Dialogue, an annual security conference in Singapore attended by civilian and military leaders from Asia-Pacific and Western nations.

As part of the strategic pivot unveiled in January, the United States will deploy 60 per cent of its warships in the Asia-Pacific, up from 50 per cent now. They will include six aircraft carriers and a majority of the U.S. navy's cruisers, destroyers, littoral combat ships and submarines.

As part of his swing through Asia last week, Panetta also visited India and Vietnam in a bid to enhance security ties with two key regional powers that have not been traditional U.S. allies but are increasingly apprehensive about China's rise.At Vietnam's deep water port of Cam Ranh Bay, a key U.S. base during the Vietnam War, Panetta said the use of this harbour would be important to the Pentagon as it moved more ships to Asia.

for the rest of the world, it's not just the continent itself that is rapidly losing its shine. The whole European political model - generous welfare systems, democratic decision-making, closer regional integration and the idea of a currency union as a stabilising factor - no longer seems nearly as appealing to other, still growing regions.

"If the euro dies, it will mark the end of the European experiment in forging closer financial and political integration. But it will also have wider international implications."

Chellaney argues the demise of the euro might help secure the primacy of the dollar - and therefore perhaps of the United States itself - for years to come.But others believe a European collapse would be a sign of things to come for the US as well.

"The health of the euro or the EU, for that matter, will have a marginal impact on gold and power that is tending any way towards Asia, especially China,"

Washington takes the potential threat of Europe's unravelling very seriously. In the short-term, the Obama administration is clearly concerned over the electoral fallout should the crisis in Europe cross the Atlantic before November's presidential election.But in the longer term, whether the euro survives or not US planners are beginning to face up to the fact that the continent will likely be poorer and rather more self-centred than Washington had hoped.

While Britain and France took the political lead in Libya last year, US Defence Secretary Robert Gates complained European NATO forces were in fact almost entirely dependent on US munitions, logistics and other backup.

But the change in European thinking and the additional defence spending Washington called for now looks all but impossible in this time of austerity.

"It's doubtful any future US Defence Secretary is even going to bother to make that kind of pitch," says Gvosdev at the US Naval War College. "We'd hoped Europe could take the lead in some parts of North Africa as well as the Balkans and Eastern Europe. That now looks very unlikely."

Washington's military "pivot " towards Asia, he said, had been based in part on the assumption that Europe would remain stable and wealthy and the US now had little or nothing to worry about on its North Atlantic flank. A weakened Europe could make US planners much less confident of that, particularly if China extends its influence.

Beijing has upped its investments in Europe in recent years, including major port projects in Greece and Italy.

Some waning of Europe's international influence was always likely, experts say, with an ageing population chewing up ever more resources and emerging economies inevitably growing faster. But the current crisis could supercharge its decline. Whether the continent's leaders realise that, however, is another matter.

"Europe's main source of influence (should) be the success of its political and economic model in providing high living standards and democratic freedoms," says Jack Goldstone, professor of international affairs at George Mason University near Washington DC "If the current crisis undermines both of those as well, Europe will look like a rather weak, badly run system of ageing and economically stagnant states. Irrelevance awaits."

In the FMCT you have another oddity. It only bans the production of highly enriched uranium and plutonium for military weapons. That means that you could still make those materials if you claimed they were for civil purposes.

It [the Fissile Material Treaty] only bans states that are non-weapons states from continuing to make materials. The problem is that if you are Iran and you're a non-weapons state, and you see weapons states being able to continue to make nuclear fuel for civil purposes under loose inspection procedures, you've got to raise your voice and say, "I don't even have weapons, why can't I make enriched uranium for civil purposes like the weapons states under the loose inspection procedures that they are obligated to? Why are you picking on me?"

There are three concerns raised by critics, and those are the three concerns that Republicans are going to focus on. The first is that the law currently requires the administration to lay out a ten-year plan with budget estimates about how they intend to keep our nuclear weapons reliable, safe, and up to date. The administration has not yet done this, as I understand it. So the Senate is going to ask for that almost certainly. Second, the numbers permitted are lower than what some people wanted them to be. The critics of this agreement are not happy that the numbers went a little bit lower than were forecast initially.

what you see in the press is that the number of warheads should be no more than 1,550, but they should be on delivery systems that when deployed are no more than seven hundred. You can have another hundred that are not operationally deployed. But we're told the counting rules for what constitutes a weapon are a little complex. A bomber, for example, carrying many bombs would only count as one weapon

both sides can engage in "limited missile defenses." The words "limited missile defenses" would be consistent with this treaty, and if one goes beyond limited missile defenses, [the other] would have the right to leave. So, first question is, "What is a limited defense program consistent with this treaty?"

the NPT review conference, which is going to be one of these agonizing, multilateral events

we don't say anything about U.S. forward-deployed systems in Europe, and we don't do that because we don't want to act unilaterally. This is an alliance issue and should be dealt with and we should achieve consensus within the alliance.

We have opportunities in NATO over the next year, in looking at the alliance's strategic concept, to talk about U.S. forward-deployed nuclear weapons, and we'll do that. It will begin very soon and continue throughout the year, looking at the Lisbon summit meeting in November.

Whether we'll have a multilateral negotiation, the NPR doesn't deal with that. We haven't addressed it as a government. I'll express my personal view on that: I don't think we're going to have a multilateral negotiation. (Chuckles.) When we were talking about INF systems in Europe, that wasn't a multilateral negotiation. I don't see it here. And it's not even clear whether the problem of Russian non-strategic weapons is amenable to arms-control kinds of solutions.

Connoisseurs of NPRs will not find the word reliance in this NPR. The last NPR said it was an objective of policy to reduce reliance on nuclear weapons, and the services took the message, as did lots of other actors. We've said we're trying to reduce the roles and numbers. But where roles remain, deterrence has to be not only maintained but strengthened in the manner of broadening and diversifying

the Russians right now are in their modernization phase. They're well into it and working their way through what their next 30 years of delivery vehicles and weapons is going to look like. We haven't really entered it. We're just now starting to get into that side of the equation.

how do you keep the balance -- not from a weapons standpoint, but from a stability standpoint -- with China, Russia and the United States, with China getting at the cutting edge of technology and moving as quickly as they can? Maybe they don't have the number of warheads today, but you still have to pay attention. And how do you take then the Russian side of this equation, which is a drastic demographic reduction, yet looking at kind of the reverse of the Fulda Gap? They're worried about divisions to their south, divisions to their west. Weapons have a very different meaning to them today than they did in the Cold War.

The Chinese are trying to understand what their threat is and how they're going to handle deterrence, and we're trying to straddle and make sure that we don't unseat this balance.

That's why, for me, it's been so important to think beyond nuclear when you're thinking deterrence. Because I just don't think nuclear is enough, in the broad spectrum of threat that we'll face.

the president has come out and said as long as we have a need for our nuclear stockpiles, as long as other nations have them, he is committed to maintaining them. He is committed to revitalizing the infrastructure, the experimental capabilities, the buildings where these people work. Much of the infrastructure I've got, particularly the uranium/plutonium infrastructure, literally dates back to the early 1950s. They were designed in the '40s, built and started operating in 1952. So it's going to take us 10 years to get this up. So it takes a sustained effort, and that's what it's going to take.

Obviously, our forward-deployed systems in Europe are -- it's a political-military issue. And I understand that the NPR did not want to prejudice the discussions underway at NATO. But if I can just separate the military for a moment, is there a military mission performed by these aircraft-delivered weapons that cannot be performed by either U.S. strategic forces or U.S. conventional forces? CARTWRIGHT: No. (Scattered laughter.)

It doesn't anywhere say we're committed to reducing reliance on. We're committed to reducing the roles and reducing the salience of, internationally

On the NATO topic, I wish it were as simple. I would put a question back: what targets do NATO's weapons have? Not nuclear. Any weapon in NATO. An alliance that doesn't have an enemy -- (scattered laughter) -- so the argument about where nuclear weapons might be pointed is only a part of the argument.

The theme we carry in the NPR and that we're going to carry forward to Tolline (ph) and beyond is that nuclear sharing is what has been essential to NATO, in terms of the credibility of deterrence and assurance. And the choices NATO makes are interpreted by its members as being reflective of how committed those members are to their Article V obligations. And there are plenty of NATO's members who are worried that NATO would make a choice to abandon nuclear weapons and thus put at risk their ability to do Article V actions. And so when we've said in our policy goal we are interested in strengthening regional deterrence and reassurance of allies, these are two sides of the same coin

Where we try and lead NATO -- the president said about NATO, he was there a year ago, to listen and learn and we'll come back to lead. As we come back to lead on this NATO nuclear topic, we're going to bring the messages of burden and risk sharing, because these are essential to the -- uniquely to this alliance. The NPR talks about extended deterrence in Europe, East Asia and the Middle East. Uniquely to the European landscape is this risk and burden-sharing dimension. And it's a different way of think about the capabilities question.

as General Cartwright observed, the technical possibilities of breakthrough and breakout capabilities are there, but the ones that Russia and China most worry about are our possible breakout capabilities. And if we're serious about meeting their requirements for strategic stability, we need to do a better job than we have of putting all of this together in a comprehensive role and getting off of defensive mode and saying, oh, don't worry, missile defenses aren't pointed at you, and strategic stability is untroubled by our capabilities, and get on to a more solid foundation.

we've tried to engage Russia on missile defense. We have proposals for extensive cooperation in the area of missile defense. The Russians haven't been interested, so far, in engaging on that. And not to mention the difficulties of engaging with them on non-strategic forces.

We need to reassure our allies for -- because we're committed to do that, but also because for a nonproliferation reason, we don't want them to develop a -- to feel they have incentives to acquire their own deterrent capabilities.

I think this is a balanced report; this is not a revolutionary report. Some were hoping for more on declaratory policy. Some were hoping that we'd go for a no-first-use approach, say that the sole purpose of U.S. nuclear weapons is to deter a nuclear attack. We weren't prepared to go there.

We believe there remains a narrow range of contingencies in which nuclear weapons continue to play a role in deterring non-nuclear attack. We're prepared to state that as an objective, but not to say we're ready yet.

I think going farther faster would have been unsettling to some of our friends around the world. I think it would be unsettling to domestic audiences as well. And we -- to be frank, the administration had its sights set on gaining two-thirds of the U.S. Senate for ratification of START and the CTBT. And I think this document will move us toward the goals enunciated by the president without kind of upsetting the apple cart and making this difficult to have further progress.

it does seem to me that in this document, the U.S. is saying we withhold the right to use nuclear weapons against an Iran that has no nuclear weapons. And in making this particular threat, we're basically just extending the continuity from the Bush administration that keeps all military options on the table and, whether explicitly or implicitly, also had threatened Iran to use nuclear weapons against Iran that did not have nuclear weapons. So I guess the way I would end this question is, is this the right message for the Green movement in Iran, for the Brazils and the Turkeys of the world that this U.S., which says it's reducing the role of nuclear weapons, reserves the right to use this weapon of mass destruction against an Iran that does not yet have nuclear weapons? EINHORN: This negative security assurance was about assuring non-nuclear weapon states, party to the NPT in good standing with the NPT. It was not about threatening -- (chuckles) -- those that are not in good standing. I know -- the Iranians will try to capitalize, there'll be a lot of Iranian propaganda that this whole thing is about an implicit threat to Iran. It's not about an implicit threat to Iran.

we made clear in the NPR that countries that are not -- we're not increasing the likelihood of using nuclear weapons against countries that are not eligible to receive this pledge. The countries that are not covered by the pledge are simply not affected by it. It's not as if we've increased the threat to France or Russia or the U.K. or something like that. And neither have we increased the threat to North Korea or Iran. The situation is simply unaffected.

Or we're as serious about NPT membership as we are compliance, because the pledge is also not offered to Israel, India and Pakistan. But it seems like those three countries are in much better shape than Iran, even though Iran is partially in compliance with its IAEA safeguards agreement.