Ahmadinejad said Iran posed no threat to other states, not even its "enemy, " Israel.

Heavy water made at Arak will be used to cool a reactor being built that will create a plutonium by-product that could be used to make atomic warheads.

Observers say Iran's move aims to send a signal of defiance days in advance of a UN deadline to halt uranium enrichment.

The US says Tehran is trying to build a nuclear weapon, while Iran says it is building a reactor to supply the country with nuclear power.

The Iranian president toured the site at Arak, 190 kilometres southwest of Tehran. After inaugurating the heavy water plant, he again said Iran would never abandon its nuclear programme, but that nuclear weapons were not its goal.

"Basically, there is no talk of nuclear weapons, " he said. "There is no discussion of nuclear weapons. We are not a threat to anybody, even the Zionist regime which is a definite enemy of the people of the region."

The ceremony comes amid mounting international pressure for Iran to suspend its nuclear programme.

Earlier this week, Iran had offered "serious talks" in response to a package of incentives offered if, by 31 August, it halted uranium enrichment . . . another possible route to nuclear weapons.

However, the US said suspension of research was required first, echoing French comments. China and Russia said earlier that talks were the only way forward.

Iran could face sanctions if it does not suspend its nuclear programme.

The heavy water reactor project at Arak has long been a bone of contention between Iran and some Western governments.

Arak was one of two Iranian nuclear facilities whose existence was revealed by an exiled Iranian opposition group four years ago. At that stage Iran had failed to declare its existence to the UN's nuclear watchdog, the International Atomic Energy Agency.

The IAEA later called on Iran to reconsider construction of its heavy water reactor project.