Iranian supreme leader Ayatollah Ali Khamenei has threatened that Iran will not play by international rules if the UN fails to refuse Iran's right to develop civil nuclear technology.

Because Iran has not suspended its nuclear program, thus ignoring UN demands, the UN Security Council is likely to pass a resolution containing sanctions against Iran on Saturday.

Observers in Iran agree that Tehran's reaction to the sanctions will show their full extent and effect more clearly than the sanctions themselves.

In a first step, Iran might end cooperation with the International Atomic Energy Agency (IAEA), in a second step; it might leave the Non-Proliferation Treaty (NPT).

Should the crisis escalate further, a military blockade of the Hormus Straight -- the main passage for worldwide oil exports in the Gulf - would not be unthinkable. This, in turn, might result in an oil crisis, at least short term.

Tehran has repeatedly threatened to take all of these steps. "If you are being cornered it's legitimate to defend yourself by all means," President Mahmoud Ahmadinejad said recently.

Deeper crisis may strengthen president's hand

Western diplomats fear that an escalation of the crisis might strengthen followers of the president and weaken the influence of moderate forces.

"If we don't act wisely, the crisis will hit both ourselves and the West and eventually the whole region," said former president Akbar Hashemi-Rafsanjani, who is one of Ahmadinejad's fiercest critics.

Although the Iranian leadership has been attempting to belittle the consequences of the sanctions as "psychological warfare," economic experts see things differently.

"Sanctions hurt economically and politically, nobody can deny that. The economy in particular is a chain, in which each malfunctioning link can upset everything,' an economist in Iran said. Infrastructure projects and the fragile civil aviation business in particular would suffer.

But Iran's Achilles heel is oil.

Isolation would hit Iran's oil deals

More than 80 per cent of the national income is generated by oil exports. But local oil consumption necessitates an increase in oil production, which currently stands at 4.2 million barrels a day. One third of that is used locally, the remainder is exported.

International cooperation to increase production is essential for Iran, in particular because of its growing home consumption. Sanctions could significantly hamper this cooperation.

The latest example is a 2-billion dollar project for the development of the Azadegan oil fields in southern Iran. Although a contract had been signed, the Japanese side backed down because of the nuclear dispute.

"How important these projects are for the country, and how severe the consequences would be if they were stalled, ordinary people can't understand," an oil expert in Tehran said.

Banking boycott could weaken economy

Sanctions might also limit future co-operations between Iranian and foreign banks. Several banks have ended their cooperation, including German Commerzbank, which has had a representation in Tehran for years and used to be considered one of Iran's main banking partners.

"So far, we can cope. But if more banks join the boycott even simple bank transfers will become difficult," Iranian sources said.

The president points to US sanctions over the last ten years, which -- according to Ahmadinejad -- had only encouraged the country to increase its efforts and to find new business partners to fill the gap left by the US.

"But even Ahmadinejad knows that his new friends, such as Venezuela, Bolivia or Nicaragua are no alternatives to Western partners," a diplomat in Tehran said.

According to observers, this is just why Ahmadinejad -- despite denouncing the Security Council as an instrument of world powers and its resolutions as "morsels of paper" -- is now keen to go to New York to stop the sanctions at the last minute.