TEHRAN, Feb 16: Iran warned on Wednesday it would shoot down any US spy craft in its skies as a powerful earthworks blast triggered fears of an attack and underscored the high state of tension in Tehran's standoff with the West over its nuclear activities.

Intelligence Minister Ali Younessi confirmed the presence of "American spying instruments" in the skies over Iran and warned that they would be targeted by the military.

"We have the means to hit them and if they get near, our anti-aircraft defence systems will attend to it," said Mr Younessi. "Americans have been conducting spying activities in the Iranian sky for a long time."

US media reports have said the United States has been flying drones over Iran since April last year, seeking evidence of nuclear weapons programmes and probing for weaknesses in Iran's air defences.

The administration of President George Bush has warned of possible military action over Iran's nuclear activities, charging that its efforts to develop nuclear fuel are a cover for an atomic weapons programme.

A big explosion near Iran's Gulf port of Daylam raised speculation of military activity when local Arabic-language television said witnesses reported seeing a missile being fired from an unidentified plane. But a senior security official insisted there was no hostile strike, just major earthworks at a dam site in a largely uninhabited area in the south of the country.

"It was an explosion set deliberately to blast through rock and open a road," Supreme National Security Council spokesman Agha Mohammadi said. "In no circumstances was it an attack against the Islamic republic's nuclear installations."

Daylam is about 150 kilometres from Bushehr, where a controversial nuclear plant is being built with Russian help, and news of the blast sent the jittery US stock market lower while world oil prices surged briefly.

Iran has denied it has nuclear weapons ambitions, saying it wants to free up its oil and gas production for export. But the United States went on the offensive again on Wednesday, with Central Intelligence Agency director Porter Goss telling Congress that Iran was stepping up efforts to build long-range missiles and remained a 'state sponsor of terrorism'.

Israeli Foreign Minister Silvan Shalom claimed during a visit to London on Wednesday that Iran was six months away from having the knowledge to build a nuclear bomb, and said the problem must be tackled by the entire world. However, the head of the UN nuclear watchdog, Mohamed ElBaradei, said in a US newspaper interview there was no evidence that Tehran was developing nuclear weapons. -AFP