Iran test-fired nine missiles on Wednesday and warned the United States and Israel it was ready to retaliate for any attack over its disputed nuclear projects.
Washington, which says Iran seeks atomic bombs, told Tehran to halt further tests. Iran, the world's fourth largest oil producer, says its nuclear programme is only for electricity.
Iran's missile tests rattled oil markets, helping crude prices to rebound about $2 a barrel after recent falls.
Speculation that Israel could bomb Iran has mounted since a big Israeli air drill last month. U.S. leaders have not ruled out military options if diplomacy fails to end the nuclear row.
Revolutionary Guards air force commander Hossein Salami said in televised comments that thousands of missiles were ready to be fired at "pre-determined targets". Missiles were shown soaring from desert launchpads, leaving long vapour trails.
"We warn the enemies who intend to threaten us with military exercises and empty psychological operations that our hand will always be on the trigger and our missiles will always be ready to launch," he said, according to ISNA news agency.
The White House told Iran to "refrain from further missile tests if they truly seek to gain the trust of the world".
But the United States gave no hint to leaders of a Group of Eight rich nations meeting in Japan this week that it planned to attack Iran, Italian Prime Minister Silvio Berlusconi said.
In Washington, a U.S. official told a Congressional panel that Iran had made only "modest" progress in its nuclear programme because of U.N. sanctions, while warning Tehran that it would pay dearly if it pursued its current course.
"It is apparent that Iran has not yet perfected enrichment (of uranium), and as a direct result of U.N. sanctions, Iran's ability to procure technology or items of significance to its missile programs, even dual-use items, is being impaired," said Under Secretary of State for political affairs William Burns.
MISSILE SHIELD
U.S. Secretary of State Condoleezza Rice suggested the tests justified U.S. plans for an anti-missile shield with bases in eastern Europe, which Russia firmly opposes.
"Those who say that there is no Iranian threat against which to be building missile defences perhaps ought to talk to the Iranians about . the range of the missiles that they test fired," Rice said in Bulgaria.
