Iran has begun producing nuclear fuel in its underground uranium enrichment plant, ratcheting up its defiance of the United Nations, according to a confidential report by the UN atomic watchdog.

It also said Tehran had started up more than 1300 centrifuge machines, divided into eight cascades, or networks, in the Natanz complex, in a campaign to lay a basis for "industrial scale" enrichment.

Both moves flew in the face of UN Security Council resolutions demanding that Iran stop enriching uranium over fears that it is a cover for mastering the means to build atomic bombs.

Tehran says it seeks only nuclear-generated electricity, but its concealment of sensitive enrichment research from the International Atomic Energy Agency and stone-walling of IAEA inquiries have shaken confidence in its intentions.

Iran announced earlier this month that it had begun enriching at Natanz, but diplomats treated the disclosure sceptically pending word from the IAEA.

To that end, the document said, IAEA inspectors visited the plant this week and were told that eight cascades were running and "some" uranium was being fed into them.

IAEA deputy director Olli Heinonen also said Iran had stopped letting inspectors verify design work at the Arak heavy water reactor, due for start-up in 2009.

Western powers see the reactor as a nuclear proliferation risk as it could be used to produce plutonium for the core of nuclear bombs.

Tehran vowed on Tuesday to pursue plans to heighten its uranium enrichment capacity and said UN sanctions would not hamper centrifuge installation in the Natanz complex, flanked by anti-aircraft guns against feared US attack.

Iran's Atomic Energy Organisation chief suggested it could take two to four years to reach the goal of 50,000 centrifuges. Iran aims to have 3000 up and running by next month.

That could be enough to refine uranium for one bomb within a year.

The United Nations Security Council has passed two sanctions resolutions on Iran since December.

Iranian President Mahmoud Ahmadinejad said yesterday during an annual military parade that Iran's army will "cut off the hand" of any attacker and is ready to fulfil its defensive duties.

"To fulfil its responsibilities, the army is at full readiness," the president said.

Canadian troops in southern Afghanistan, meanwhile, have intercepted a shipment of Iranian-made rockets, mortar bombs and plastic explosives bound for Taliban fighters.

The munitions, in boxes marked in Farsi, the Iranian language, were found near Kandahar within the last week.

The discovery follows allegations that Iran's Revolutionary Guard Corps, known as the Pasdaran, has been supplying Iraqi insurgents with booby-trap bombs capable of penetrating tank armour for attacks on US and British troops.

A Pentagon spokesman said there was no doubt the "disturbing quantity" of arms found in Afghanistan had originated in Iran, but there was no way of telling whether they were sent with the knowledge of the government in Tehran.

A handful of al Qaeda leaders who fled to Iran in 2001 when coalition forces invaded Afghanistan and toppled their Taliban hosts may have provided the link between Tehran and the Taliban.

Richard Boucher, US assistant secretary of state, said there were "concerns" over Iran's role in clandestine support for the Afghan militants and officials were "watching developments very carefully".

General Peter Pace, chairman of the US joint chiefs of staff and America's senior military officer, said coalition troops in both theatres would continue to take "aggressive action" against Iranian-sponsored networks.

"We will attack any element inside Iraq or Afghanistan that is attacking US and coalition forces. On the wider front, the West should use diplomacy to address Iranian interference," he added.