Addressing the annual American Legion convention in Salt Lake City, Bush said Iran has responded with defiance and delay to demands to stop enriching uranium.

"There must be consequences for Iran's defiance," Bush said, stressing "we must not allow Iran to develop a nuclear weapon."

Thursday is the deadline for Tehran to heed the UN Security Council demand to halt production of nuclear fuel.

Bush also blamed Iran for supporting the Lebanese militant group Hezbollah, for helping to destabilize Iraq by sponsoring insurgents and supplying components for improvised explosive devices, and for denying basic human rights to millions of its own people.

"The world now faces a grave threat from the radical regime in Iran," the president said.

So far, the Bush administration has not said publicly what type of sanction it might impose on Iran.

But the New York Times reported that the proposed sanction will begin with restrictions on imports of nuclear-related equipment and material. Eventually, punitive measures might expand to restrict travel by Iran's leaders and limit the country's access to global financial markets.

The United States, joined by Russia, China, Britain, France and Germany, offered Iran the incentive package in exchange for a commitment from Tehran to freeze enrichment.

But Iran defiantly refused to make compromise, saying Tehran won't be bullied into giving up its right to nuclear technology.