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A second, the official said, was to send a clear message to the United States and other countries that Israel was prepared to act militarily if diplomatic efforts to stop Iran from producing bomb-grade uranium continued to falter.

But American officials were also told that Israel had prepared plans for striking nuclear targets in Iran and could carry them out if needed.

Two sets of advance Russian-made radar systems were recently delivered to Iran. The radar will enhance Iran's ability to detect planes flying at low altitude.

The report came hours after Secretary of State Condoleezza Rice warned Iran that Washington will not back down in the face of threats against Israel.

Israeli Prime Minister Ehud Olmert has said drastic measures are needed to stop Iran obtaining nuclear weapons.

Mr Olmert told members of the American Israel Public Affairs Committee that targeted economic sanctions imposed against Iran were not enough.

"The international community has a duty and responsibility to clarify to Iran, through drastic measures, that the repercussions of their continued pursuit of nuclear weapons will be devastating," he said.

This has no relevance on dollar-shekel trade. I assume if we see a strike, there will be a reaction," said Neil Corney, treasurer for Citigroup's Israel office in Tel Aviv.

Iran has previously threatened to close the Strait of Hormuz if it comes under attack. About 40 percent of globally traded oil moves through the Gulf waterway.

The United States, France, Britain, China, Russia and Germany offered the package last month and said Iran must suspend its uranium enrichment work before formal talks on implementing it.

A second goal, the official was quoted by the New York Times as saying, was to give a clear message to the US and the rest of the world that Israel was prepared to attack Iran if diplomatic efforts to stop the country's march toward the production of bomb-grade uranium fail.

The New York Times went on to claim that Iran had recently beefed up its air defenses. "They are clearly nervous about this and have their air defense on guard," a US official was quoted as saying.

MOSCOW - Russia's foreign minister on Friday warned against the use of force on Iran, saying there is no proof it is trying to build nuclear weapons.

The IAEA suggested in a report to the U.N. Security Council last month that Iran was stonewalling investigators and possibly withholding information crucial to determining whether it conducted research on nuclear weapons.

On Monday, Iran and Iraq signed a Memorandum of Understanding on bilateral defense cooperation. The agreement lays out the basis for an "expansion of defense cooperation between the two countries,"  according to Iran's official IRNA news agency. The agreement is expected to play a role in influencing Baghdad to refuse an American request that US troops be allowed to remain in Iraq past the end of 2008.

n addition to its defense pact with Iraq, Iran signed a similar Memorandum of Understanding with Syria in 2006. Iran and Syria cooperate in supplying and supporting the Hizbullah terrorist organization endeavoring to take over Lebanon, on Israel's northern border.