As standoff with Iran continues, U.S. prepares targeted sanctions

In the past year, as the president has publicly pursued engagement, Levey has quietly gathered ammunition for a financial assault on Iran. At one point, he assembled in his office representatives of countries that might join the United States in such actions, including European powers, Japan, Australia and the United Arab Emirates.

Levey has also won the imposition of fines on major international banks, such as $536 million on Credit Suisse this month, for helping Iran evade U.S. sanctions. American officials hope that his track record will make companies think twice about doing business with Iran. "When you put all of this together it creates a risk profile, so that not just banks but other parts of the private sector see that the trend is all going in the same direction," one official said. "That whole dynamic increases the possibility that we could successfully apply significant and effective pressure on Iran."

A complicating factor

Ironically, the protests may also have doomed efforts to begin negotiations on the nuclear issue. Iranian negotiators, meeting with diplomats from the United States and other powers in Geneva on Oct. 1, had tentatively agreed to a deal to swap much of its enriched uranium for fuel for a medical research reactor used to treat diseases. But then Iranian leaders split over the deal, especially after opposition leaders questioned it.

Iranian officials, even if they wanted to engage, have been hamstrung because of the protests, Iranian analysts said. "It is the internal crisis that really worries our leaders. They can't speak with one voice in the international community at this point," said Mashallah Shamsolvaezin during a phone interview conducted before he was arrested Tuesday in Tehran for unknown reasons. He said there will be no compromise with the West as long as Iran's internal political crisis continues.

Administration officials have not given up hope that the deal can be revived -- they are encouraging Turkish efforts to bridge the gap -- but they say the apparent turmoil it generated within the Iranian leadership is a useful side benefit of engagement. The effort to engage "has had an unsettling effect on people in the regime," one official said. "It has made it more difficult to demonize the United States and say it has been the root of all evil."

U.S. officials say engagement also has paid dividends in recruiting international support for sanctions. China appears to be the biggest roadblock to robust U.N. sanctions, despite a personal plea by Obama to Chinese President Hu Jintao to consider the effect on stability in the Persian Gulf -- from where China gets much of its oil -- if Israel tried to destroy Iran's nuclear facilities.

"The Chinese are going to be very complicated on this issue," one official said. "They have a direct stake in the stability of the Persian Gulf, and we have tried to underscore the risks of instability. So far, they understand the argument but don't have the sense of urgency that other countries have."

Correspondent Thomas Erdbrink in Tehran contributed to this report.