Iranian President Mahmoud Ahmadinejad inaugurated on Saturday a new phase in the Arak heavy-water reactor project, part of Iran's atomic program, which the West fears is aimed at producing bombs.
A agency witness said the president inaugurated the project and toured the site at Khondab, which is near Arak 120 miles southwest of the capital Tehran.
The plant's plutonium by-product could be used to make atomic warheads.
The move came days before a UN deadline for Iran to halt uranium enrichment, the part of the program, which is the biggest worry to the West.
But the latest development is likely to raise further fears in Western capitals.
"Inaugurating the heavy water production plant in Arak is a big step toward using Iran's right, which means reaching peaceful nuclear technology," Foreign Ministry spokesman Hamid Reza Asefi was quoted by state television as saying.
An Iranian nuclear official said this week that heavy water production itself was not a proliferation risk but a Western diplomat said such a move would not be a constructive step.
Western nations accuse Iran of seeking to master technology to produce nuclear weapons. Iran, the world's fourth largest oil exporter, insists its aim is only for electricity.
A small group of correspondents from foreign news organizations were taken with Iranian journalists to Khondab, the site near Arak where the heavy-water project is being built, to attend the presidential speech.
The complex was protected by dozens of anti-aircraft guns and surrounded by a four-meter high barbed wire fence.
Photographers and TV journalists were asked not to take any images except in areas where they were specifically permitted.
The Iranian nuclear official had said Iran would start up heavy-water production but not the reactor.
He said this unit had no military use so supervision by the UN watchdog, International Atomic Energy Agency (IAEA), was not obligatory.
"The product of this project provides for cooling and depleting systems of the reactor, that can be used in various industries," the official said.
The West's main concern is Iran's program for enriching uranium, a process that can be used to make fuel for nuclear power stations or material for bombs.
The UN Security Council passed a resolution on July 31 giving Iran 30 days to halt enrichment or face possible sanctions.
The resolution also cited a call by the IAEA for Iran to reconsider construction of its heavy water reactor project.
Iran's deputy parliament speaker, Mohammad Reza Bahonar, warned the West in comments published by Iran's Sharq newspaper on Saturday that putting pressure on the country could prompt public calls for Iran to pursue a weapons program.
"Be afraid of the day that the Iranian nation comes into the streets and stages demonstrations to ask the government to produce nuclear weapons to combat the threats," he said.
Iranian officials consistently say Iran has no plans to build atomic weapons. Iran's highest authority, Supreme Leader Ayatollah Ali Khamenei, has issued a religious decree, saying making, stockpiling or using nuclear weapons was against Islamic beliefs, the official IRNA news agency reported in August 2005.