TEHRAN- President Mahmoud Ahmadinejad called the Holocaust a lie Friday, raising the stakes against Israel just as world powers try to decide how to deal with the nuclear ambitions of an Iran in political turmoil.

The pretext (Holocaust) for the creation of the Zionist regime (Israel) is false ... It is a lie based on an unprovable and mythical claim, he told worshippers at Tehran University at the end of an annual anti-Israel Qods (Jerusalem) Day rally.

Confronting the Zionist regime is a national and religious duty.

Ahmadinejad's anti-Western comments on the Holocaust have caused international outcry and isolated Iran, which is at loggerheads with the West over its nuclear program.

The hardline president warned leaders of Western-allied Arab and Muslim countries about dealing with Israel.

This regime (Israel) will not last long. Do not tie your fate to it ... This regime has no future. Its life has come to an end, he said in a speech broadcast live on state radio.

Germany said Ahmadinejad was a disgrace to his country.

This sheer anti-Semitism demands our collective condemnation. We will continue to confront it decisively in the future, Foreign Minister Frank-Walter Steinmeier said.

White House spokesman Robert Gibbs said Ahmadinejad's comment only serves to isolate Iran further from the world.

Ahmadinejad won support from Sayyed Hassan Nasrallah, leader of Lebanon's Iran-backed Hezbollah which fought a 34-day war with Israel in 2006. Our belief and creed ... remain that Israel is an illegal entity, a cancerous tumor, that must cease to exist, Nasrallah said in a televised address.

Ahmadinejad will appear next week at the United Nations General Assembly and Tehran will hold talks on October 1 with major powers worried about the Islamic Republic's nuclear strategy.

Western powers are concerned by what they have called Tehran's defiance and point-blank refusal to suspend uranium enrichment and address the issue as demanded by U.N. Security Council resolutions since 2006.

Instead of directly addressing those demands, Iran handed world powers this month a proposal that spoke generally of talks on political, security, international and economic issues but was silent on its nuclear program.

Diplomats familiar with the Iranian proposal said it was vague and did not appear to pass the smell test.

U.S. Secretary of State Hillary Clinton said it was time Iran showed it is serious about addressing international concern. There will be accompanying costs for Iran's continued defiance: more isolation and economic pressure, she said.

NUCLEAR PROGRAMME
Ahmadinejad repeated Thursday that Iran would never abandon its disputed nuclear program to appease critics.

In an NBC-TV interview, he also offered no direct response when asked whether there were any conditions under which Iran would develop a nuclear weapon.

We don't need nuclear weapons, Ahmadinejad said, speaking through an interpreter. We do not see any need for such weapons. And the conditions around the world are moving to favor our ideas, he added.

The major powers suspect Iran's uranium enrichment program is a cover for developing nuclear weapons. Iran has repeatedly said it is enriching uranium only to generate electricity, not for fissile bomb material, although it has no nuclear power plants to use low-level enriched uranium.

Next month's major powers talks with Iran offer no clear relief to Israel, which wants world powers to be prepared to penalize Iran's vulnerable energy imports but sees Russia and China blocking any such resolution at the U.N. Security Council.

The major powers, which include permanent U.N. Security Council members Britain, China, France, Russia and the United States as well as Germany, offered Iran trade and diplomatic incentives in 2006 in exchange for halt to uranium enrichment.

They improved the offer last year but retained the demand that Iran suspend uranium enrichment, something Tehran has ruled out as a precondition.

President Barack Obama, who came to office pledging to engage with Iran, has suggested Tehran may face harsher sanctions, possibly targeting its gasoline imports, if it does not accept good-faith talks by the end of September.

But Russia, which has veto power in the U.N. Security Council, last week ruled out oil sanctions against Iran.

Iran, the world's fifth-biggest crude producer, is seen as vulnerable to oil sanctions because it imports 40 percent of its gasoline to supply the cheap fuel Iranians see as a birthright.

TURMOIL AT HOME

At home, Ahmadinejad is facing strong opposition which erupted into unrest following his disputed re-election in June.

Friday, Iranian security forces clashed with supporters of opposition leader Mirhossein Mousavi and arrested at least 10 of them during annual anti-Israel rallies in Tehran.

Thousands of supporters of Mousavi, wearing green wristbands or shawls, were among crowds marching in the Qods Day rallies.

The state news agency IRNA said Mousavi and reformist cleric Mehdi Karoubi, both defeated candidates in June, had been forced to leave the rallies after being attacked by angry people.

Reformist former president Mohammad Khatami took part in the rally, but was attacked by hardliners and had to leave after his robe was ripped and his turban fell to the ground, an ally of Khatami who accompanied him told Reuters.
The June vote, which was followed by huge opposition protests, plunged Iran into its worst political crisis in three decades and revealed deepening rifts within its ruling elites.

Opposition leaders say the poll was rigged to secure Ahmadinejad's re-election. The authorities deny it.

The opposition says 70 people died during protests after the vote. It contradicts the official death toll of 36 people.

(Additional reporting by Yara Bayoumy in Beirut, Alexandra Hudson in Berlin)

(Writing by Samia Nakhoul; Editing by Dominic Evans)

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