TEHRAN: Iran's president gave instructions on Sunday for the production of higher-grade nuclear reactor fuel despite an offer by world powers to provide it to the Islamic Republic to allay fears Tehran is making an atomic bomb.

President Mahmoud Ahmadinejad's announcement prompted U.S. Defense Secretary Robert Gates to call Iran's response "very disappointing." Gates has suggested it is time for more sanctions against Tehran.

Ahmadinejad, who says his country's nuclear program is to make electricity and not bombs, told Iran's Atomic Energy Organization to start work on producing higher-grade reactor fuel for a medical research reactor.

The United States and other big powers have proposed that Iran send most of its low-enriched uranium abroad in return for nuclear fuel refined to a level of 20 percent, for use in the Tehran reactor producing medical isotopes.

But Ahmadinejad's declaration that Iran will make its own nuclear fuel rather than accepting it from abroad under the nuclear swap plan raises the stakes in the dispute.

"We had told them (the West) to come and have a swap, although we could produce the 20 percent enriched fuel ourselves," Ahmadinejad said in a televised speech at a ceremony marking Iran's latest laser technology achievements.

"We gave them two-to-three months' time for such a deal. They started a new game and now I (ask) Dr Salehi to start work on the production of 20 percent fuel using centrifuges," he said, referring to atomic energy chief Ali Akbar Salehi who attended the event.

But Salehi said his organization was only put on standby.

"The president ordered the Atomic Energy Organization to be on standby, so that if the talks on nuclear fuel exchange does not reach an agreement, then the organization starts production, because this needs some preparations," he told the official IRNA news agency.

State broadcaster IRIB quoted Ahmadinejad as saying that if world powers agreed to swap uranium without conditions, "then we would cooperate as well. We are ready for negotiations."

Iran enriches uranium to a level of about 3.5 percent. Refined uranium can have both civilian and military uses -- the latter requiring much higher levels of enrichment.

"If the international community will stand together and bring pressure to bear on the Iranian government, I believe there is still time for sanctions and pressure to work. But we must all work together," Gates told a news conference in Rome.

"Pressures that are focused on the government of Iran, as opposed to the people of Iran, potentially have greater opportunity to achieve the objective," he said.