Iran has demanded the immediate release of five of its citizens held in a US military raid in northern Iraq, who it says are diplomats.

The US says the detainees arrested on Thursday in Irbil are linked to the Iranian Revolutionary Guards which they say trains and arms Shiite insurgents in Iraq.

But Iran's foreign ministry says they were "involved in consulate affairs".

Iran also demanded compensation for damage to the Iranian liaison office where the men were seized.

Teheran

"Their activities were legal and in the framework of the law," Foreign Ministry spokesman Mohammad Ali Hosseini said in response to the allegations.

He said the building the Americans attacked opened in 1992 and was officially registered as the Iranian consulate. The Iraqi authorities have said it was a liaison office in the process of being registered as a consulate.

But Iran is adamant the office and the staff inside should have had diplomatic protection and that America's action was illegal.

"What the Americans claim is incorrect. The Americans want to radicalise the atmosphere in Iraq to justify their occupation, but we will act wisely," he said.

Teheran has protested to the ambassadors of Iraq and Switzerland, which represents American interests in Iran.

The raid followed a warning by President George W Bush on Wednesday that the US would take a tough stance towards Iran and Syria, whom he accused of destabilising Iraq.

Tehran vehemently denies the charges.

The Revolutionary Guards unit, known locally as the Pasdaran, is a parallel military force with its own army, air force and navy.

It was set up to enforce and defend the principles of the 1979 Islamic revolution and answers directly to Supreme Leader Ayatollah Ali Khamenei.

PHOTO CAPTION

Children walk past the wreckage of a vehicle after a car bomb attack in Baghdad January 13, 2007. (Reuters)