The council earlier this week said it would carry out a partial recount, but had ruled out a re-run of the poll demanded by Mr Mousavi.

However, opposition supporters are likely to be more encouraged by a statement from the Assembly of Experts - Iran's top clerical body responsible for appointing the supreme leader and, in theory, monitoring his performance. "We congratulate the excited, epic-making and alert presence of 85% of the revolutionary people" in the election, the statement said. It made no mention of the disputed result.

The Assembly of Experts is headed by former President Akbar Hashemi Rafsanjani, who is a strong supporter of Mr Mousavi and a key rival of Mahmoud Ahmadinejad. The question now, our correspondent says, is whether Mr Rafsanjani will make his power play, and possibly challenge the supreme leader himself.

She said a Wall Street Journal colleague had been "interviewing a young man on the street the other night, and one of the militiamen came up and put a bullet through his neck and killed him".

Mr Rafsanjani's daughter, Faezeh, addressed supporters of Mr Mousavi on Tuesday. The Fars news agency said on Thursday that Faezeh and her brother Mehdi had been barred from leaving Iran over their alleged role in the unrest.

Mr Mousavi and reformist former President Mohammad Khatami have sent a joint letter to the head of the judiciary asking for an end to "the violent actions against people and to free those arrested".

Ebrahim Yazdi, a foreign minister after the 1979 revolution and now leader of the Freedom Movement of Iran, was arrested while undergoing tests at a hospital in Tehran, a spokesman for his organisation said.

"We want to see a stop to the settlements," Clinton told reporters as she stood next to Lieberman, himself a settler. "We think that is an important and essential part of pursuing the efforts leading to a comprehensive agreement and the creation of a Palestinian next to an Israeli Jewish state that is secure in its borders and future," she said.

Mitchell has said a key element has been trying to pin down exactly what Israel means by the "natural growth." Netanyahu says he wants growing families to be able to accommodate their children in towns that Israelis have built on occupied land.

The officials, speaking on condition of anonymity, said allowances for continued building could be made if, for example, a project in a settlement was nearing completion or for cases in which money has been invested in a project and cannot be reimbursed.

Clinton cited a recent Washington Post op-ed piece by former U.S. ambassador to Israel, Daniel Kurtzer. In background discussions with journalists, former Bush administration officials said that no formal agreements exist which support Israel's contention that the U.S. approves of settlement construction to accomodate natural growth, Kurtzer wrote.

Western and Israeli officials said this week that while the United States wants Israel to impose a moratorium on new tenders for building in settlements, it was nevertheless considering allowances that could permit some projects already under way to proceed.

Prime Minister Benjamin Netanyahu will meet Mitchell in Europe next week to try to hammer out an agreement, Israeli officials said.

Mitchell has said a key element has been trying to pin down exactly what Israel means by the "natural growth" of settlements that Netanyahu has said he will defend. In principle, Netanyahu says he wants growing families to be able to accommodate their children in the towns that Israelis have built.

The officials, speaking on condition of anonymity, said allowances for continued building could be made if, for example, a project in a settlement was nearing completion or for cases in which money has been invested in a project and cannot be reimbursed.

Mitchell said in Washington on Tuesday of his meetings with Israeli and other officials: "There are almost as many definitions (of natural growth) as there are people speaking."

Netanyahu has asserted that his government does not have the legal authority to stop building in cases in which tenders for new structures have already been awarded or when homes under construction have already been purchased.

Yariv Oppenheimer of the anti-settlement watchdog group Peace Now said Israel was likely to use any U.S. flexibility to ramp up building in the West Bank. "In the past, every time there was an understanding, the outcome was Israel doubled the number of settlers in the West Bank," he said.

Some half a million Jews live among nearly three million Palestinians in the West Bank and East Jerusalem, territories which were captured from Jordan in the 1967 Six Day War.

In another show of defiance on Wednesday, six footballers playing for Iran's national team appeared in a World Cup qualifier in Seoul, South Korea, wearing armbands in the green associated with Mr Mousavi.

Iranian affairs analyst Meir Javedanfar said the protests had forced Ayatollah Ali Khamenei into the centre of an escalating crisis and had broken taboos about questioning his final word on important matters. "It's changing the way Iranians see the supreme leader and the system in general. That opens up the system in ways it's never faced before."

The council conducted a limited recount after the first round of the 2005 election, which put Ahmadinejad into the run-off against Hashemi Rafsanjani. The recount was carried out behind closed doors. The council gave the results a clean bill of health but did not publish its findings.

The situation this time is very different, there is far more pressure on the council and Khamenei from the street and from within the religious establishment, from important figures such as Rafsanjani. But Rafsanjani is not a council member.

The recount poses a dilemma for the opposition: to participate may imply endorsement of a process of which it is highly suspicious. To stand aloof takes away any chance of influencing the process and risks projecting the image of spoilers.

Khamenei and the council also face a dilemma: admission of any rigging would dent the pure image of Iranian democracy they have attempted to project. To deny any shortcomings, on the other hand, could trigger fury on the streets, and discredit the pillars of the Islamic republic.

The episode demonstrates the extent to which the administration views social networking as a new arrow in its diplomatic quiver. Secretary of State Hillary Rodham Clinton talks regularly about the power of e-diplomacy, particularly in places where the mass media are repressed.

There were also suspicions that some pro-government forces might be using new-media outlets to send out misinformation. One popular opposition site, Persiankiwi, warned its followers on Tuesday to ignore instructions from people with no record of reliable posts.

Mr. Cohen, a Stanford University graduate who is the youngest member of the State Department’s policy planning staff, has been working with Twitter, YouTube, Facebook and other services to harness their reach for diplomatic initiatives in Iraq and elsewhere.

Tehran has been buzzing with tweets, the posts of Twitter subscribers, sharing news on rallies, police crackdowns on protesters, and analysis of how the White House is responding to the drama.With the authorities blocking text-messaging on cellphones, Twitter has become a handy alternative for information-hungry Iranians. While Iran has also tried to block Twitter posts, Iranians are skilled at using proxy sites or other methods to circumvent the official barriers.

Last month, he organized a visit to Baghdad by Mr. Dorsey and other executives from Silicon Valley and New York’s equivalent, Silicon Alley. They met with Iraq’s deputy prime minister to discuss how to rebuild the country’s information network and to sell the virtues of Twitter.

In addition to Twitter, YouTube has been a critical tool to spread videos from Iran when traditional media outlets have had difficulty filming the protests or the ensuing crackdown. One YouTube account, bearing the user name “wwwiranbefreecom,” showed disturbing images of police officers beating people in the streets. On Monday, Lara Setrakian, an ABC News journalist, put out a call for video on Twitter, writing, “Please send footage we can’t reach!”

Journalists were told on Tuesday that they could not cover protests without permission. The restrictions “effectively confine journalists to their offices,” a spokesman for the BBC said.

In the first official ­confirmation, state radio also reported that seven people had been killed at the end of Monday when state militia appeared to open fire on demonstrators bent on breaking into a building.It was feared this rally of Ahmadinejad supporters would result in further deadly clashes between ordinary ­Iranians. But violence was avoided, to begin with at least, after the Mousavi campaign rescheduled its mass meeting to a northern district of Tehran and an hour later.

Two pro-reform figures, newspaper editor Saeed Laylaz and Hamid Reza Jalaipour, an activist and journalist, were arrested on Wednesday morning, reports said.

About 100 reformist figures were arrested on Sunday as opposition grew to the election results. Many have since been released.

Overnight, members of Iran's Basij volunteer militia reportedly raided university dormitories in several Iranian cities. The Basij stormed compounds, ransacking dormitories and beating up some students. Several arrests were made, our correspondent says, and the dean of the university in the city of Shiraz has resigned.

In the most high-profile incident, 120 lecturers at Tehran university resigned after a raid on that institution.

Ayatollah Khamenei has not appeared in public since the election results, but now seems to be deeply involved in the search for a solution to the stand-off. Meeting representatives of the four election candidates, he urged all parties not to agitate their supporters and stir up an already tense situation. He also repeated his offer of a partial vote recount, a proposal already rejected by the main opposition. "In the elections, voters had different tendencies, but they equally believe in the ruling system and support the Islamic Republic," the Associated Press reported him as saying. "Nobody should take any action that would create tension, and all have to explicitly say they are against tension and riots."

Witnesses said Tuesday's demonstrators walked in near silence towards state TV headquarters - apparently anxious not to be depicted as hooligans by authorities. Thousands of President Mahmoud Ahmadinejad's supporters staged a counter-rally in Vali Asr Square in central Tehran - some bussed in from the provinces, observers say.

As night fell, residents took to the roof-tops of their houses to shout protest messages across the city, a scene not witnessed since the final days of the Shah, our correspondent says.

"A number of people who are armed, I don't know exactly who they are, but they have started to fire on people causing havoc in Azadi Square." A photographer at the scene told news agencies that security forces had killed one protester and seriously wounded several others.

He said the shooting began when the crowd attacked a compound used by a religious militia linked to the country's powerful Revolutionary Guard.

The AFP news agency reported that police fired tear gas and groups of protestors set motorbikes alight.

The renewed protests come after Mr Mousavi and fellow defeated candidate Mohsen Rezai filed official complaints against the election result with the Guardian Council - the country's powerful clerical group.

The gathering followed an announcement from Iran's supreme leader, Ayatollah Ali Khamenei, that he had ordered an investigation into claims vote-rigging had given the incumbent president, Mahmoud Ahmadinejad, a landslide victory.

The rally had been banned by the authorities and was initially called off by Mousavi amid fears of violence. But tens of thousands of people, dressed in Mousavi's green campaign colours, took to the streets, chanting "God is great" and "We fight, we die – we will not accept this vote-rigging".Calling on Ahmadinejad to resign, they said the election results were a "coup d'etat" and chanted "Death to the lying government".

Scuffles broke out as Ahmadinejad supporters on motorbikes used sticks to beat the marchers. Mousavi had attempted to cancel the rally after receiving warnings that militias responsible for policing it would be equipped with live ammunition

An aide to Palestinian President Mahmoud Abbas, meanwhile, said Sundaythat the speech "sabotages" regional peace efforts, due to Netanyahu's refusal to accept an influx of Palestinian refugees into Israel and his unwillingness to compromise on the status of Jerusalem.

"Netanyahu's remarks have sabotaged all initiatives, paralyzed all efforts being made and challenges the Palestinian, Arab and American positions," said Nabil Abu Rudeinah.

Netanyahu pledged in the address that Jerusalem be the undivided capital of Israel and that Palestinian refugees not be allowed into Israel

A senior Palestinian negotiator, meanwhile, called on U.S. President Barack Obama to intervene to force Israel to abide by previous interim agreements that include freezing settlement activity in the West Bank. The alternative, he said, was violence. "President Obama, the ball is in your court tonight," Saeb Erekat said. "You have the choice tonight. You can treat Netanyahu as a prime minister above the law and ... close off the path of peace tonight and set the whole region on the path of violence, chaos, extremism and bloodletting.

"The alternative is to make Netanyahu abide by the road map," he said, referring to a U.S.-sponsored document under which Israel agreed to freeze settlement activity and Palestinians agreed to rein in militants hostile to Israel. "The peace process has been moving at the speed of a tortoise," Erekat added. "Tonight, Netanyahu has flipped it over on its back."

Both Israeli Arab and rightist political leaders blasted the speech as political spin, while President Shimon Peres praised it as "strengthening Israel's international position and opening the door to direct peace negotiations." "The Prime Minister's speech was a true and courageous speech that referred to the main issue - the establishment of a demilitarized Palestinian state alongside the state of Israel, the state of the Jewish People," said Peres.

MK Aryeh Eldad (National Union) accused Netanyahu of violating his own promises and said the nationalist camp could no longer support his policies. "Today the prime minister lost the leadership of the nationalist camp by not only transgressing his own red lines, but by converting from his own religion," said Eldad of Netanyahu's declaration that he would accept the creation of a Palestinian state so long as the international community could guarantee it remains demilitarized. "With the expression 'demilitarized Palestinian state,' Netanyahu is trying to eat a pig butchered in a kosher way," he added. "There is no such thing as a demilitarized state, Netanyahu knows very well that no political force on earth can prevent a country from arming itself or signing military treaties like any other country."

MK Zevulun Orlev, of the Jewish Home party, said that the policy represented a drastic change in stance and was an affront to the coalition agreement.

the degrading and disrespectful nature of Netanyahu's remarks. That's not how one brings down a wall of enmity between two nations, that's not how trust is built.

Unless the street protests achieve unexpected momentum, the election could cast the pro-reform classes — especially the better off and better educated — back into a state of passive disillusionment, some opposition figures said. “I don’t think the middle class is ever going to go out and vote again,” one Moussavi supporter lamented.

Although his first election was marred by allegations of cheating, Mr. Ahmadinejad was credited with being genuinely street smart. He roused crowds with vague attacks on the corruption of the elite, with promises of a vast redistribution of wealth, and with appeals to Iranian pride. By playing to the Muslim world’s feelings of victimization by the West and hatred of Israel, he won adulation on the Arab street even as Arab leaders often disdained him, and that in turn earned him credibility at home.

As president he has presided over a time of rising inflation and unemployment, but has pumped oil revenues into the budget, sustaining a semblance of growth and buying good will among civil servants, the military and the retired. More important, he has consolidated the various arms of power that answer ultimately to the supreme leader. The Revolutionary Guards — the military elite — was given license to expand into new areas, including the oil industry and other businesses such as shipbuilding.

The Guardian Council, which oversees elections, had its budget increased 15-fold under Mr. Ahmadinejad. The council has presided over not only Friday’s outcome, but over parliamentary majorities loyal to Mr. Ahmadinejad.

The president seemed to stumble often. He raised tensions with the West when he told a United Nations General Assembly that he rejected the post-World War II order. He was mocked when he said at Columbia University in 2007 that there was not a single gay person in Iran. In April, nearly two dozen diplomats from the European Union walked out of a conference in Geneva after he disparaged Israel.

But political analysts said that back home, the supreme leader approved, seeing confrontation with the West as helpful in keeping alive his revolutionary ideology, and his base of power.