BRUSSELS,  (Reuters) – World leaders face pressure to  find a new policy for dealing with Iran following its disputed  presidential election and crackdown on protesters, but are  unlikely to tighten sanctions any time soon.

The United States and the European Union want to encourage  democratic change but will also try to avoid doing anything that  could block the way to dialogue with Tehran when the crisis ends  or be portrayed by Iranian leaders as interference, experts say.

They are likely to hold back the threat of tighter sanctions  for use in discussions on Iran’s nuclear programme. Agreement on  trade sanctions would be unlikely anyway because of opposition  from U.N. Security Council members China and Russia.

But they may also avoid embarking on any new strategy for  now while the situation in Tehran remains fluid.

“The dynamics of the ruling establishment have changed, the  dynamics of the opposition have changed. We are dealing with a  totally new scenario,” said Mehrdad Khonsari, an analyst at the  Centre of Arab and Iranian Studies in London.

World leaders may have been caught off guard because they  expected former prime minister Mirhossein Mousavi to win the  June 12 election.

In the event, he was declared a distant second behind  President Mahmoud Ahmadinejad, prompting street protests and a  crackdown by the Iranian authorities in which about 20 people  have been reported killed and hundreds have been arrested, and  exposing deep rifts in the ruling elite.

“What we are seeing has completely changed the dynamics in  which we were hoping to engage in dialogue with Iran,” said   Clara O’Donnell of the Centre for European Reform in London. “For the moment, we are still seeing what we have seen  before — leaders holding back, trying to see what is happening,  trying to make sure they are not seen as meddling in the system  and not making matters worse for the protesters.”

CONCERNS OVER
NEW SANCTIONS

The 27-nation EU has been fiercely critical of Iran in the  crisis, and often more outspoken than Washington, which has been  trying to engage with Iran under President Barack Obama.

But, like the United States, the EU has avoided talk of new  punitive measures.

“My worry is that talk of sanctions, talk of a tougher line,  might just be the start of an excuse for the Iranian leadership  not to listen in to what is now being said by the Iranian  people,” Swedish Prime Minister Fredrik Reinfeldt, about to take  the EU presidency for six months, told Reuters in an interview.

The United States and the EU have scant leverage on Iran,  which limits their options to condemnations of the repression  and calls for the people’s democratic will to be respected.

In addition, they fear that Russia and China are seeking to  use their good relations with the authorities in Tehran as a  pawn in a geopolitical game with the West.

The EU and the United States also know they will need to  talk to whoever is in power to try to halt a nuclear programme  that they fear could produce a nuclear bomb, although Iran  denies it has any plans to do so.

BIG STICK ON
NUCLEAR ISSUE

Obama is reluctant for now to upset his policy of  encouraging dialogue with Iran.

“They (the Americans) don’t want to prejudice the future and  want to keep open the possibility of dialogue with Iran once the  internal crisis is over,” said Clement Therme, an analyst at the  French Institute of International Relations in Paris.

“There’s only a certain window of opportunity if they want  to get Iran to stop its nuclear programme and all the time this  situation is evolving that window of opportunity gets smaller.”

For this reason, Washington is likely to want to keep the  threat of fresh sanctions in reserve.

United Nations sanctions on Iran already cover weapons,  nuclear materials, the travel and finances of individuals and  firms, and other financial and trade measures.

The EU has frozen the assets of Iran’s biggest bank, Bank  Melli, and imposed visa bans on some officials.

The United States has banned most U.S.-Iran trade and  imposes sanctions on foreign companies that invest more than $20  million a year in Iran’s energy sector.

Options for more sanctions could range from more individual  travel bans on Iranian officials to putting pressure on European  oil companies to quit Iran and, ultimately, trying to embargo  the supply of gasoline to Iran, which lacks refining capacity  despite being the world’s biggest oil exporter.

The Europeans have cut back on export credit guarantees for  trade with Iran and could cut them further, although Germany,  Italy and Austria are reluctant, especially when their exporters  are struggling in the global economic crisis.

It is a small set of options, and would be a harder starting  point for any engagement with Iran on the nuclear issue.