Iran warned on Tuesday that it would "set fire" to Israel and US forces in response to any attack over its nuclear drive, as the world's leading industrial powers told Tehran to freeze uranium enrichment.

Leaders of the Group of Eight nations at a summit in Japan urged Iran to fully comply with UN Security Council resolutions "in particular to suspend all enrichment-related activities."

They also urged Tehran to respond positively to a new package by six major powers to bring a peaceful end to the five-year-old nuclear standoff between Iran and the international community.

In Kuala Lumpur, Iranian President Mahmoud Ahmadinejad downplayed the threat of an attack, saying it would be "political suicide" for US President George W Bush - whose term of office ends in January. "Any finger that will trigger the bullet, the Iranian people will cut it," he told a press conference at a summit of developing nations.

The United States and its top regional ally Israel have never ruled out military action against Iran over its nuclear drive, which the West fears could be aimed at building an atomic bomb.

There has been concern a strike could be imminent after it emerged that Israel had carried out manoeuvres in Greece that were effectively practice runs for a potential strike against Iranian nuclear facilities.

"The first US shot on Iran would set the United States' vital interests in the world on fire," said Ali Shirazi, supreme leader Ayatollah Ali Khamenei's representative to the naval forces of the elite Revolutionary Guards.

"Tel Aviv and the US fleet in the Persian Gulf would be the targets that would be set on fire in Iran's crushing response," he said, according to the Fars news agency.

His comments came as the Revolutionary Guards embarked on a new round of war games to sharpen their combat readiness amid continued tensions in the nuclear crisis.

War games

The Great Prophet III manoeuvres by the missile and naval sections of the Revolutionary Guards are aimed at "improving the combat capability" of the forces, Fars reported.

The Guards are responsible for Iran's most significant ballistic missiles including the Shahab-3 missile, whose range puts Israel and US bases in the Gulf within reach.

US and British warships on Tuesday also completed a five-day exercise aimed at rehearsing protection of oil installations in the Gulf, the Bahrain-based US Fifth Fleet said.

However, diplomatic efforts are also continuing. Iran has responded to an offer from world powers to end the nuclear crisis and diplomats are analysing what is said to be a complex answer from Tehran.

The offer proposes that Iran suspend uranium enrichment - the process which they fear could be used to make a nuclear weapon - in exchange for technological incentives.

However, the French foreign ministry confirmed that Iran does not say in its response it is prepared to freeze enrichment.

"The fact that there is no mention of suspending sensitive activities is clearly an issue," said foreign ministry spokesman Eric Chevallier.

Iran's ambassador to Britain Rassoul Movahedian told the official IRNA News Agency that the West was "just wasting its time" by insisting that Tehran should suspend enrichment.

Several Iranian officials last week sounded optimistic notes about the package that contrasted with the hard line of Ahmadinejad, sparking speculation that the authorities were split on the issue.

EU foreign policy chief Javier Solana, who delivered the package to Tehran last month, has described the response as a "complicated and difficult letter that must be thoroughly analysed".

At the G8 summit, French President Nicolas Sarkozy said the world powers planned to send Solana back to Iran to discuss "the differences between their latest proposals and the ones that were already on the table."

But Solana's spokeswoman Cristina Gallach said that while preparations were being made for a meeting between Solana and top Iranian nuclear negotiator Saeed Jalili, the date and location had not been determined.

Iran, a leading OPEC member, insists its nuclear programme is aimed solely at generating energy for a growing population whose fossil fuel reserves will eventually run out.