President Mahmoud Ahmadinejad said on Wednesday Iran had tested a missile that defense analysts say could hit Israel and U.S. bases in the Gulf, a move likely to fuel Western concern about Tehran's nuclear ambitions.
Ahmadinejad announced the test on the same day campaigning for the June 12 presidential election officially started.
A U.S. official said the test was a "step in the wrong direction".
One Western expert saw the missile test as Iran's response to the Israeli prime minister's U.S. visit this week.
Coming a day after Iran's supreme leader accused the United States of promoting terrorism, the test was a further disappointment for U.S. President Barack Obama's administration, which is seeking rapprochement with Iran after three decades of mutual mistrust.
"Iran just keeps going in the wrong direction. We want them to engage with us, to talk about how we can make the region more stable. This is just a step in the wrong direction," the U.S. official said.
U.S. patience is "not infinite", the official added.
The United States and its allies suspect the Islamic Republic is seeking to build nuclear bombs, a charge Tehran denies, but Obama has offered a new beginning of diplomatic engagement with Iran if it "unclenches its fist."
A U.S. defense official confirmed the launch, although Pentagon spokesman Bryan Whitman declined to say whether the U.S. military had any evidence of an Iranian missile test.
"Our concerns are obviously based on their nuclear ambitions and the implications that long- and medium-range missiles have with respect to that," Whitman told reporters. "Iran is at a bit of a crossroads. They have a choice to make.
"They can either continue on this path of continued destabilisation of the region or they can decide that they want to pursue relationships with countries in the region and the United States that are more normalised," he said.
In Rome, Italian Foreign Minister Franco Frattini cancelled a trip to Iran after Tehran demanded he meet Ahmadinejad in the same northern Iranian province where the missile launch took place, the Italian Foreign Ministry said.
He would have been the most senior official from a European government to visit since Ahmadinejad came to power in 2005.
Ahmadinejad, whose moderate challengers in the June 12 vote accuse him of isolating Iran with his anti-Western speeches, said the country had the power to send any attacker "to hell."
He was addressing a rally in the northern Semnan province, where the official IRNA news agency said the test took place. State television showed the Sejil 2 surface-to-surface missile soaring into the sky, leaving a vapour trail.
'GREAT DESTRUCTIVE POWER'
The stated range of Sejil -- some 2,000 km (1,200 miles) -- would be almost the same as that of another Iranian missile, Shahab 3. Analysts say such weaponry could reach Israel, U.S. regional bases and southeastern Europe.
"The Sejil 2 missile, which has an advanced technology, was launched today ... and it landed exactly on the target," Ahmadinejad said.
Defense Minister Mostafa Mohammad Najjar said Sejil had "great destructive power" and that mass production of the missile had started, stressing it was aimed at deterring any aggressors, the ISNA news agency reported.
Iran previously test-fired a Sejil last November, saying then it was a new generation of surface-to-surface missile.
But the U.S. defense official said the missile appeared to be consistent with Tehran's older Ashura models, long known to U.S. intelligence. However the official, who spoke on condition of anonymity, said the Pentagon had yet to analyze technical data that would provide clues to the missile's trajectory and target.
A report by the joint U.S.-Russian think-tank EastWest Institute said Iran could develop a basic nuclear device in 1-3 years and a missile-borne nuclear warhead five years after that, but there was no proof of such intent and Iran was unlikely to start a nuclear conflict.
A British military expert said he believed Wednesday's launch was Iran's response to Israeli Prime Minister Benjamin Netanyahu's visit to Washington this week, during which he underscored the Jewish state's worries about Iran.
Like his predecessor George W. Bush, Obama has not ruled out military action if diplomatic efforts fail to resolve the nuclear row. Israeli leaders have raised U.S. concern by hinting at pre-emptive strikes if they decide diplomacy has failed.
Iran has said it would respond to any attack by targeting U.S. interests and America's ally Israel, as well as closing the Strait of Hormuz, a vital route for world oil supplies.