Iran announced on Sunday that scientists there have produced the country's first nuclear fuel rod.

That came a day after US President Barack Obama signed into law a defense bill that imposed sanctions on financial institutions dealing with Iran's central bank.

A military personnel carries ammunition on a naval ship during Velayat-90 war game on Sea of Oman near the Strait of Hormuz in southern Iran, Dec 31, 2011. [China Daily]

It also came after Iran had said it has been compelled to manufacture fuel rods on its own since international sanctions have banned Teheran from buying them on foreign markets.

The European Union expects to reach a decision by the end of January on expanding sanctions against Iran, a EU spokesman said on Sunday.

The head of Iran's Chamber of Commerce, Mohammad Nahavandian, rejected the move as "unjustifiable", saying such sanctions would have reciprocal consequences.

"The Iranian nation and those involved in trade and economic activities will find other alternatives," said Nahavandian.

He said European countries should not miss the investment opportunity in an emerging market like Iran.

Both the European Union and the United States have said they are willing to hold talks with Iran on its controversial nuclear program, provided they are meaningful and without preconditions.

So far talks between Iran and the five permanent members of the UN Security Council - the United States, Russia, China, Britain and France - plus Germany have been stalled for a year.

Nuclear fuel rods contain pellets of enriched uranium that provide fuel for nuclear power plants.

Iran's atomic energy agency's website said the first domestically made rod has already been inserted into the core of Teheran's research nuclear reactor. It is unclear if the rod contained pellets or if it was inserted as part of a test and it was empty.

The West fears Iran's uranium enrichment program is meant to make atomic weapons - a charge Teheran denies.

The US sanctions target both private and government-controlled banks - including central banks - and will take effect after a two- to six-month warning period, a senior Obama administration official said.

Under the law, the president can move to exempt institutions in a country that has significantly reduced its dealings with Iran and in situations where a waiver is in the US national security interest or otherwise necessary for the stability of energy markets. To grant a waiver, he must tell Congress of his intention. The waiver would only be temporary but could be extended.

Sanctioned institutions would be frozen out of US financial markets. "Our intent is to implement this law in a timed and phased approach so that we avoid repercussions to the oil market and ensure that this damages Iran and not the rest of the world," the senior US official told Reuters.

Senior US officials said Washington was consulting its foreign partners to ensure the new sanctions can work without harming global energy markets.

In another development, Iran successfully test fired a medium-range, surface-to-air missile on Sunday during naval war games taking place near the Strait of Hormuz, a narrow channel at the entrance of the Persian Gulf, a spokesman for the maneuvers told the official Islamic Republic News Agency.

"This medium-range, surface-to-air missile is equipped with the latest technology to combat radar-evading targets and intelligent systems which try to disrupt missile navigation," Commodore Mahmoud Mousavi was quoted as saying.

He said it was the first time Iran had tested the missile, which was "domestically designed and built".

It was not immediately known whether the missile was fired from a ship or from land.

The missile's launch and the war games are meant to show Iran's military capabilities at a time when the United States and other Western nations are putting greater pressure on Teheran in response to its nuclear program.

The fact that they are taking place near the Strait of Hormuz has drawn attention to Iran's threats in recent days that it might close the strait if more sanctions are imposed.

Twenty percent of the world's oil passes through the strait, making it the "most important chokepoint" in the world, according to the US Energy Information Administration.

The sanctions Obama signed on Saturday were contained in a mammoth $662-billion defense bill. They are likely to deepen acrimony between Washington and Teheran.

The sanctions require foreign firms to make a choice between doing business with Teheran's oil and financial sectors or central bank or the mighty US economy and financial sector.

The bill, which passed by wide majorities in Congress, did leave some leeway to Obama, giving him the power to grant 120-day waivers if he judges them to be in the national-security interests of the United States.

Earlier this month, Treasury Secretary Timothy Geithner wrote to Congress to express concern against an earlier, tougher measure, saying it could harm the campaign of the US and its partners to isolate Iran.

Geithner argued that foreign allies might resent the new US measures, making it less likely they would cooperate and more likely the sanctions would have the "opposite effect" of their intended purpose of isolating Iran.