A triumphant President Mahmoud Ahmedinejad opened Iran's first plant for producing nuclear fuel today, marking a significant leap forward for his controversial nuclear programme and sparking international fears that the Islamic Republic may be closer than ever to acquiring an atomic weapon.

Just two months before crucial elections in which he is pitted against a powerful moderate candidate, the hardline Iranian leader celebrated the breakthrough in his country's pursuit of nuclear technology, saying that Iranian scientists have tested two new types of enrichment centrifuges with a higher capacity for producing uranium. The President has insisted that the nuclear fuel will be used only for generating electricity, but the international community fears that it could also be used to build nuclear warheads.

Israel in particular, which Mr Ahmedinejad has in the past threatened to annihilate, has warned that Iran is trying to become a nuclear power, and the new hawkish Government in Jerusalem has said that it would be willing to take all measures, including military action, to prevent Tehran achieving that goal. Many Arab states, led by Egypt and Saudi Arabia, also fear growing Iranian power in the region and an accelerating arms race in the Middle East.

The ribbon-cutting ceremony in Isfahan, in central Iran, coincided with the country's national Nuclear Day. The new plant will produce pellets of uranium oxide to fuel the heavy-water research reactor, which is expected to be up and running either this year or next. The international community is worried that Iran could reprocess spent fuel from the heavy-water reactor into plutonium for building a warhead.

The Iranian news agency said that the fuel plant can produce 10 tonnes of nuclear fuel annually to feed the heavy water Arak reactor as well as 30 tonnes for light water reactors such as the Bushehr nuclear plant.

Gholam Reza Aghazadeh, the head of Iran's nuclear programme, said that the country had reached a "new phase of acquiring the technology of uranium enrichment", adding that 7,000 centrifuges had been installed at the Natanz uranium enrichment facility, which is also in Isfahan.

That is far more than the 3,964 centrifuges that the International Atomic Energy Agency said were already at work in Natanz in February. It said that another 1,476 were undergoing vacuum or dry-run tests without nuclear material, while another 125 had been installed but not been deployed.

Alaeddin Borujerdi, the head of Iran's parliamentary commission of national security and foreign policy, said: "Today the nuclear fuel cycle has been practically completed and there is no room for the idea of halting (uranium) enrichment in the negotiations with global powers".

The high-profile event came just a day after Mr Ahmedinejad responded cautiously to a proposal by Barack Obama, the US President, for more open, direct relations between the two hostile countries. Mr Ahmedinejad said that he was ready for talks with the West if they were based on "justice" and "respect".

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