Mr Khatami, a moderate elected last year, said that his government had noted a change in tone from US officials - but that practical steps and not just words would be needed if the two countries were to end two decades of hostility.

"I hope this change of tone is the sign of a better understanding on the part of American leaders for Iranian positions, the Iranian people and the international situation," he told reporters.

Action not words

"But we will evaluate that sincerity in concrete gestures and not in words," he said. The president said, tantalisingly, that Tehran could "if necessary, say more on this subject."

Madeleine Albright: "roadmap"

Last month the American Secretary of State Madeleine Albright offered to explore new ways of improving links with Iran and offered a "roadmap" to better relations.

She gave no details of the confidence building measures she had in mind, and US sanctions on Iran remain in place.

Hard-liners in the Iranian parliament have already rejected her overture, underlining how little room for manoevre President Khatami has in his response.

The United States severed relations with Iran in 1980 after 52 US diplomats were taken hostage in the embassy in Tehran during the 1979 Islamic revolution. They were released in early 1981.

Italian PM's pioneering visit to Tehran

President Khatami's statement came after talks with the Italian Prime Minister, Romano Prodi, who is making a ground-breaking visit to Tehran.

It is only the second such visit by a Western leader since the 1979 Islamic revolution, and the first since President Khatami's election.

Iran analyst Hazhir Teimourian: The visit is an attempt to support Iran's moderates against conservatives (3'20")

Diplomatic relations between the European Union and Iran suffered a major setback in April 1997, after a court case implicated Iran in the 1992 assassination of four Iranian dissidents in Berlin.

The earlier fatwa or religious decree calling for the death of the British author Salman Rushdie for his book The Satanic Verses is also a barrier to closer relations.

Mohammad Khatami's election has eased tensions, but EU efforts to resume talks by the end of June were stalled when Iran complained that Europe would be represented by bureaucrats instead of politicians.

Mr Prodi's discusssions with the Iranian leadership were wide-ranging and covered Iran's human rights record, the restructuring of the UN Security Council and fighting the international drugs trade.