“While the EU continues to work for a diplomatic solution, the window of opportunity will not remain open indefinitely,” said the statement issued at a meeting of the 25 European Union members in Brussels.

“The mood is getting more skeptical... on whether the EU 3 can play any role,” said a senior official, adding that the ball was now firmly in the Iranian government’s court.

“The European Council is gravely concerned at Iran’s failure to build confidence that its nuclear programme is exclusively peaceful,” said the statement.

The European Council, which brings together ministers from member states, is the main decision-making body within the European Union.

The EU said it was keeping its “diplomatic options under review” with regard to Iran - a thinly veiled warning that the bloc might support a move to refer Iran to the U.N. Security Council for possible sanctions.

Referring to a speech earlier this week by Ahmadinejad, in which he referred to the Jewish Holocaust as a “fairytale”, the EU said: ”These comments are wholly unacceptable and have no place in civilised political debate.”