Iran has warned it will respond immediately to any military strike after a blast 150km from a nuclear site sparked fears of an attack, state news agency IRNA says.

"An attack, whatever it is, against any site, whether it be nuclear or not, would produce a very rapid response," Defence Minister Ali Shamkhani said on Thursday.

"The Iranian nation would not yet have even been informed of an attack against a site, nuclear or not, before learning of our decisive reaction."

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

Earthworks

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

The blast occurred near Dailam, about 150km from Bushehr, where a controversial nuclear power plant is being built with Russian help.

Al-Alam later dropped any reference to a missile strike from its news bulletins.

"Nothing happened in the region" of Bushehr, said Shamkhani, accusing the media of exaggeration.

Financial market shake

Reports of the blast sent a shock through world financial markets.

The US stock market dropped briefly and sent oil prices higher; underscoring world jitters over Iran's nuclear programme, which Washington says conceals an effort to build an atomic bomb.

"This explosion basically sent chills down the spines of futures traders," said Phil Flynn, senior market analyst at Alaron Trading Corp in Chicago.

Psychological war

Iranian officials have charged that the reports carried by the foreign media were part of a "psychological war being waged by the United States against Iran".

The administration of US President George 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.

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

Israeli action

Earlier on Wednesday, Israel's Foreign Minister Silvan Shalom said Iran was six months away from having the knowledge it needed to produce a nuclear bomb.

Israel has hinted in the past at possible military action to stop Iran acquiring the bomb. But senior Israeli security officials denied military involvement in the blast.

An Israeli air strike on the Iraqi reactor Osiraq in 1981 dealt a severe blow to Saddam Hussein's nuclear programme.

Nuclear reactor

Iran's Russian-built 1000-megawatt nuclear reactor is to start operating in late 2005 and will reach full capacity in 2006.

Russian Atomic Energy Agency chief Alexander Rumyanstev is to travel to Iran next week to help prepare the plant to start up.

Tehran on Wednesday accused the United States of using satellites "and other tools" to spy on its nuclear sites and threatened to shoot down any aerial surveillance craft.

Reacting to the blast report, a US Defence Department spokesman said: "It is US policy to deal with Iran in a diplomatic manner."

The US State Department said it had no information on the blast report.

PHOTO CAPTION

A handout picture released by Iran's Atomic Energy Organization shows technicians aligning reactor pressure vessel-head nozzles inside the Bushehr nuclear power plant, the Islamic republic's first reactor, some 1,300 kms south of Tehran. (AFP)