Sweden vowed to protect staff at European Union embassies in Iran on Wednesday, the first day of its EU presidency, but Tehran accused it of interfering in its affairs and demanded an apology.

Deteriorating relations with Iran could pose a big challenge for Sweden in its six-month presidency, during which it wants to guide Europe out of its worst economic crisis in decades and agree an EU position for climate change talks.

One EU diplomat said countries in the 27-nation bloc were discussing a proposal to withdraw their envoys from Iran in protest at its detention of three British embassy employees. Germany and Italy were among those sceptical of such a move, he said.

"We have to show solidarity and present a united front in the EU, and we have to discuss what measures might be involved," Swedish Prime Minister Fredrik Reinfeldt told a news conference marking the handover of the EU presidency.

Reinfeldt said the bloc was watching events in Iran but denied a media report that EU states had already agreed to withdraw their ambassadors from Iran in a joint protest.

He said the EU wanted to show support for calls for reform but must not "polarise Iran from the rest of the world so that we are made an excuse for the use of violence and oppression inside Iran. That is the balance that needs to be struck."

The 27-nation bloc has led international criticism of the June 12 presidential election that returned hardliner Mahmoud Ahmadinejad to power and prompted street protests and a crackdown in which about 20 people were reported killed.

But world leaders already have sanctions in place against Iran and their leverage is limited, particularly as they want to keep their powder dry for talks on Iran's nuclear programme and the United States has opened the door to dialogue with Iran.

EU WARNS OVER HARASSMENT

The EU has said it will not let foreign embassy staff be harassed in Iran, and Reinfeldt and Foreign Minister Carl Bildt made clear the Union was in contact with Tehran on the issue.

"We have to take action both in our countries to protect the Iranian diplomatic missions and they have to ensure that staff at the European embassies are not subject to harassment by the authorities. So that's an ongoing dialogue where we are showing both European strength and solidarity," Bildt said.

Asked about the possibility of withdrawing EU ambassadors from Iran, Bildt said the bloc was "taking one step at a time".

In Brussels, the EU diplomat said there would be discussions on the proposal on Friday and Saturday. "It depends also on what is going on in Iran," the diplomat added.

Despite the EU's pledges to keep talking, Iran accused it of interference and demanded an apology before any more talks on Tehran's nuclear programme, which the West says is intended to develop atomic weapons. Iran denies this.

"Because of the interference of this (EU) group in the post-election riots ... they have lost their qualification to hold nuclear talks with Iran," Major-General Hassan Firouzabadi was quoted as saying by the semi-official Fars news agency.

Three EU powers, Britain, France and Germany, have led negotiations with Iran over the nuclear work. Reinfeldt said he had heard nothing from Tehran over the nuclear programme.

Iran is the first big foreign policy problem for Sweden, which took over the EU presidency from the Czech Republic at midnight. Each member state holds the presidency in rotation, a role which gives it a say in the EU's policy priorities.