By Marcus George
DUBAI (Reuters) - Iran said on Tuesday it had successfully tested medium-range missiles capable of hitting Israel as a response to threats of attack, the latest move in a war of nerves with the West.
Israel says it could attack Iran if diplomacy fails to secure a halt to its disputed nuclear energy program. The United States also has military force as a possible option but has repeatedly encouraged the Israelis to be patient while new economic sanctions are implemented against Iran.
The Islamic Republic announced the "Great Prophet 7" missile exercise on Sunday after a European embargo against Iranian crude oil purchases took full effect following another fruitless round of big power talks with Tehran.
Iran's official English-language Press TV said the Shahab 3 missile with a range of 1,300 km (800 miles) - able to reach Israel - was tested along with the shorter-range Shahab 1 and 2.
"The main aim of this drill is to demonstrate the Iranian nation's political resolve to defend vital values and national interests," Revolutionary Guards Deputy Commander Hossein Salami was quoted by Press TV as saying.
He said the tests were in response to Iran's enemies who talk of a "military option being on the table".
On Sunday, Iran threatened to wipe Israel "off the face of the earth" if the Jewish state attacked it.
Analysts have challenged some of Iran's military assertions, saying it often exaggerates its capabilities.
Senior researcher Pieter Wezeman of the Stockholm International Peace Research Institute said Iran's missiles were still relatively inaccurate and of limited use in conventional warfare. With conventional warheads, "their only utility is as a tool of terror and no more than that", he said by telephone.
He added, however, that they could be suitable for carrying nuclear warheads, especially the larger ones.
The International Institute for Strategic Studies, said in a 2010 report that all Tehran's ballistic missiles were "inherently capable of a nuclear payload", if Iran was able to make a small enough bomb.
Iran denies Western accusations that it is seeking to develop nuclear weapons capability. The world's No. 5 oil exporter maintains that it is enriching uranium only to generate more energy for a rapidly growing population.
OIL MARKETS ON EDGE
Iran has previously threatened to block the Strait of Hormuz, through which more than a third of the world's seaborne oil trade passes, in response to increasingly harsh sanctions by the United States and its allies intended to force it to curb its nuclear research program.
Fars said dozens of missiles involved in this week's exercises had been aimed at simulated air bases, and that Iranian-built unmanned drones would be tested on Wednesday.
Iran repeated its claim to be reverse-engineering the sophisticated U.S. RQ-170 drone that it says it brought down during a spying mission last year.
"In this drone there are hundreds of technologies used, each of which are valuable to us in terms of operations, information and technicalities," General Amir Hajizadeh was quoted by the ISNA news agency as saying.
Wezeman said Iran had a large standing armed force, but that its weapons were generally outdated. "And those weapons only get older and older and they don't have access to new technology because they are under a United Nations arms embargo."
In his first comments since the European Union oil ban took force, President Mahmoud Ahmadinejad said sanctions would benefit Iran by lessening its dependence on crude exports.
"We must see the sanctions as an opportunity ... which can forever take out of the enemy's hands the ability to use oil as a weapon for sanctions," Fars news agency quoted him as saying.
Negotiations over Iran's nuclear program continued in Istanbul on Tuesday with a meeting of technical experts from Iran and six world powers.
The discussions follow a round of political talks in Moscow last month at which the sides failed to bridge differences or agree on a further round of talks at that level.
The experts have no mandate to strike agreements but the six powers - the United States, China, Britain, Germany, France and Russia - hope that by clarifying technical aspects of Tehran's work they can open way for more negotiations in the future.
Diplomats in Istanbul said discussions were "detailed" and would most likely be followed by a meeting between a senior negotiator from the European Union and Iran's deputy negotiator Ali Bagheri. Such a meeting could, at a later date, be a prelude to talks on a political level, diplomats have said.
"We hope Iran will seize the opportunity ... to show a willingness to take concrete steps to urgently meet the concerns of the international community," EU foreign policy chief Catherine Ashton said ahead of the meeting. Ashton and her team represent the six powers in dealings with Iran.
As a priority, the powers want Iran to stop enriching uranium to levels close to weapons-grade, ship out any stockpile, and close a secret facility where such work is done.
Iran denies its program has a military dimension and wants relief from economic sanctions before it makes any concessions.
IRANIAN CALL TO SHUT OIL LANES
On Monday, Iranian parliamentarians proposed a bill calling for Iran to try to stop tankers taking crude through the Strait of Hormuz to countries that support the sanctions.
However, the Iranian parliament is relatively weak, analysts say, and the proposal has no chance of becoming law unless sanctioned by Iran's clerical supreme leader.
That is seen as unlikely in the near term given that Western powers have said they would tolerate no closure of the Strait while Iranian leaders, wedded to strategic pragmatism for the sake of survival, have said they seek no war with anyone.
"It's a gesture at this stage," said independent British-based Iran analyst Reza Esfandiari.
"They want to emphasize that Iran can make life difficult for Europe and America. I think this is more of an attempt to offset falling crude prices. Financial markets are very sensitive to such talk."
On Tuesday, the price of Brent crude, which has been on a downward trend for the last three months, broke $100 for the first time since early June.
"A lot depends on nuclear talks," said Esfandiari. "If there's no progress and the initiative is deadlocked, then these kind of actions will intensify."
(Additional reporting by Yeganeh Torbati in Dubai, Fredrik Dahl in Vienna and Justyna Pawlak in Brussels; Editing by Mark Heinrich, Kevin Liffey and Michael Roddy)