Iran has started the process of enriching uranium to 20% in defiance of the West, Iranian state media says.The process was begun at the Natanz plant in the presence of International Atomic Energy Agency (IAEA) inspectors, al-Alam state television reported.
The move came after Western powers stepped up pressure for international sanctions against Iran.
China, a UN Security Council member, has called for further talks over Iran's nuclear programme.
The US and its Western allies say Iran is trying to develop a nuclear weapon - a charge Iran denies.
Iran's top nuclear official, Ali Akbar Salehi, was quoted by state news agency Irna as saying Iran "had started the 20% enrichment in a separate cascade in Natanz".
The BBC's John Leyne says Tuesday's announcement is designed to stress Iran's view that it is only acting within its rights.
As international pressure grows on Iran, there will surely be those within the Islamic Republic who will argue that Tehran should build a bomb - if only to protect against an attack designed to prevent just such a danger.
Experts are still divided over whether Iran has taken the decision to actually build a bomb, he says.
Iran currently enriches uranium to a level of 3.5% but requires 20% enriched uranium for its Tehran research reactor, which is meant to produce medical isotopes. A bomb would require uranium enriched to at least 90%.
Enriching to 20% would take about one year, using the 2,000 centrifuges at the underground Natanz facility, experts say.
But moving from 20% to 90% would take only six months and only require between 500 and 1,000 centrifuges.
Iran insists its nuclear programme is entirely peaceful and designed to provide civilian power.
It had already announced on Sunday that it aimed to start producing uranium enriched to 20%.
Mr Salehi also said the government would build 10 new enrichment plants next year, despite the fact that it still had problems with its first one.
The US and France reacted by saying that the time had come "for the adoption of strong sanctions", while the British government described Iran's new position as deeply worrying.
The UN Security Council has already imposed three rounds of sanctions against Iran in an effort to make it cease all uranium enrichment activities and heavy-water projects, which could produce plutonium suitable for use in weapons.
Chinese Foreign Ministry spokesman Ma Zhaoxu refused to comment directly on sanctions at a press conference on Tuesday, the Associated Press news agency reported.
"I hope the relevant parties will step up efforts and push for progress in the dialogue and negotiations," he was quoted as saying.
In October, a deal brokered by the IAEA was thought to have been struck for Iran to send its uranium to Russia and France for enrichment.
But last month, diplomats said Iran had told the IAEA that it did not accept the terms of the deal - though there have since been other, conflicting messages.
Mr Salehi has said that enriched uranium production would be halted if Iran received fuel enriched to 20% from abroad.
