Washington's response? In the most bellicose speech yet given by a top administration official, Vice President Dick Cheney warned Iran of "serious consequences" if Iran does not freeze its nuclear program, and accused Tehran of "direct involvement in the killings of Americans".

Is the specter of violence in Iraq being remote-controlled from Tehran a bluff, designed to build support inside the Beltway for an attack on Iran?

It may look that way as the Democratic Congress and a war-weary military would need major jolt to support military action.

But Cheney's remarks could also signify a shift in the administration's position. The aim may now be more limited strikes -- for example, on camps in Iran where Iraqi Shiite militia have allegedly been training recently.

Given Iran's extensive nuclear know-how, it is probable that the regime is still trying to produce nuclear weapons. Should they succeed, not only will Iranian hard-liners be bolstered, but Iranian foreign policy will become even more aggressive and a regional arms race with Egypt and Saudi Arabia will be on the cards.

A nuclear Iran could also manipulate oil prices by blocking shipping lanes or by using terrorist proxies to threaten oil facilities in the Middle East.

European inaction is unlikely to dissuade the Bush administration from attacking Iran. This, in turn, will be disastrous for the Middle East.

The EU should make clear that it opposes both U.S military action and a nuclear-armed Iran. To show both Washington and Tehran that it means business, the EU should follow through on its own "Common Position" of April 23 and impose tougher sanctions.

In this, Europe possesses significant leverage. Trade between Europe and Iran may be falling -- between January and April British exports to Iran fell by 17.2 percent while French and Italian exports dropped by over 40 percent -- but established commercial routes will not disappear. Germany, Italy and France are Iran's top three trading partners, with total exports worth $9,802 million in 2006. Iran's second-largest trading partner, the United Arab Emirates, is a conduit for further trade with Europe.

Much of Iran's state-controlled industry is dependent on German engineering exports, 65 percent of which in 2005 came with government-backed export credit guarantees. Britain similarly offered more than $200 million worth of guarantees to British companies in 2006. The construction of the Nabucco pipeline, part owned by several EU government, represents a considerable investment in Iran and its completion will make Iran a key energy partner.

Further sanctions, starting with a withdrawal of all export credits to European firms doing business with Iran - even if it means gifting billions to Iran - are key. European firms should be told that doing "business as usual" with the mullahs will not go unpunished.

We should also consider restricting the Iranian Central Bank's access to euros and blackballing state-associated banks.

Will sanctions work? Iran's hard-line leadership has galvanized popular support behind the nuclear program and seems unlikely to bow to sanctions.

But it is clear that the regime finds it increasingly difficult to attract foreign investment for key projects. The Iranian oil minister admitted as much in July. Its dilapidated economy is kept afloat by the artificially high oil price and its oil infrastructure is being maintained, not developed to keep apace with energy demands.

Iran now needs to create 800,000 to 1,000,000 new jobs a year to hold unemployment constant. With the unemployment rate among young people estimated at nearly 50 percent, the regime - which came to power on a pledge to create jobs - is concerned about the effects of an economic slowdown induced by further sanctions.

Tougher sanctions could thus cause Tehran sufficient pain that it understands it has to take part in genuine negotiations and that it will not survive if it continues its current course.

However, any solution to the crisis will ultimately require carrots as well as sticks including assistance with a peaceful nuclear program, diplomatic recognition of Iran by the United States, closer economic ties with the EU, and a regional approach to Middle Eastern security.

For the moment, tougher sanctions, combined with the promise of assistance if Iran cooperates, are the best way both to compel Iran and restrain the U.S. It's about time the EU got off the fence.

(Daniel Korski is a senior fellow at the European Council on Foreign Relations. Until earlier this year, he was a senior British official and head of the U.K. Provincial Reconstruction Team in Basra, Iraq.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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