Intelligence Minister Ali Younessi confirmed the presence of "American spying instruments" in the skies over Iran and warned that they would be targeted by the military.

"We have the means to hit them and if they get near, our anti-aircraft defence systems will attend to it," said Younessi. "Americans have been conducting spying activities in the Iranian sky for a long time."

US media reports have said the United States has been flying drones over Iran since April 2004, seeking evidence of nuclear weapons programmes and probing for weaknesses in Iran's air defences.

The administration of US President George W. Bush has warned of possible military action over Iran's nuclear activities, charging that its efforts to develop nuclear fuel are a cover for an atomic weapons programme.

A big explosion near Iran's Gulf port of Daylam raised speculation of military activity when local Arabic-language television said witnesses reported seeing a missile being fired from an unidentified plane.

But a senior security official insisted there was no hostile strike, just major earthworks in an largely uninhabited area in the south of the country.

"It was an explosion set deliberately to blast through rock and open a road," Supreme National Security Council spokesman Agha Mohammadi told AFP. "In no circumstances was it an attack against the Islamic republic's nuclear installations."

Daylam is about 150 kilometres (90 miles) from Bushehr, where a controversial nuclear plant is being built with Russian help, and news of the blast sent the jittery US stock market lower while world oil prices surged briefly.

Iran, lumped by Bush into an "axis of evil" along with Saddam Hussein's Iraq and North Korea, has staunchly denied it has nuclear weapons ambitions, saying it wants to free up its oil and gas production for export.

But the United States went on the offensive again Wednesday, with Central Intelligence Agency director Porter Goss telling Congress that Iran was stepping up efforts to build long range missiles and remained a "state sponsor" of terrorism.

Israeli Foreign Minister Silvan Shalom claimed during a visit to London that archfoe Iran was six months away from having the knowledge to build a nuclear bomb, and said the problem must be tackled by the entire world.

However, the head of the UN nuclear watchdog, Mohamed ElBaradei, said in a US newspaper interview published Wednesday there was no evidence that Tehran was developing nuclear weapons.

Relations between Tehran and Washington have deteriorated since Bush took office for the second time in January, caused principally by the nuclear standoff and Iran's alleged interference in Iraq.

To stave off the threat of UN sanctions, as demanded by Israel and the United States, Britain, France and Germany are trying to convince Iran to stop uranium enrichment in exchange for economic and political rewards.

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