Diplomacy-sanctions policy on Iran to go on: Solana

GENEVA (Reuters) - Western powers will continue a "double track" policy of sanctions and diplomacy towards Iran over its nuclear activity, EU foreign policy chief Javier Solana said on Wednesday, despite Iranian warnings this could backfire.

The European Union leader told Reuters Iran had still not replied to world powers' offer of enhanced economic incentives which he presented to Tehran on June 14 to coax it into halting uranium enrichment, but hoped for an answer soon.

"I hope so. That is what we were told, that they would think about it and they would give us an answer soon," he said after addressing the U.N. disarmament conference in Geneva.

"In the meantime, we will keep the double track open ... We want to have a solution which is diplomatically negotiated."

On Tuesday, the Islamic Republic's foreign ministry said broader sanctions imposed on it by the EU over its nuclear plans could damage diplomatic efforts to resolve the standoff.

Western powers suspect Iran wants to develop nuclear weapons. Tehran, the world's fourth largest oil exporter, denies this, saying it wants to enrich uranium only to enhance its electricity supply.

The dispute between the West and the Islamic state has sparked fears of a military confrontation that would disrupt oil supplies. Last week a U.S. newspaper report said Israel had practiced for a possible strike against Iran's nuclear sites.

A senior Iranian official denied rumors on Tuesday of an Israeli attack on his country, which sent stocks lower and oil prices higher.

Iranian officials have repeatedly ruled out suspending enrichment, which can have both civilian and military uses.

Their refusal to do so has drawn three rounds of limited U.N. sanctions since 2006 and Western powers have warned of more such measures if Iran rejects the latest offer.

(Reporting by Stephanie Nebehay; Editing by Mark Heinrich)