For the first time in nearly two decades of escalating tensions over Iran's nuclear programme, world leaders are genuinely concerned that an Israeli military attack on the Islamic Republic could be imminent - an action that many fear might trigger a wider war, terrorism and global economic havoc. High-level foreign dignitaries, including the United Nations chief and the head of the American military, have stopped in Israel in recent weeks, urging leaders to give the diplomatic process more time to work.

Israel seems unmoved, and United States Defence Secretary Leon Panetta has reportedly concluded that an Israeli attack on Iran is likely in the coming months. US President Barack Obama said yesterday that he does not think Israel has decided whether to attack Iran, telling NBC News in an interview that the US was "going to be sure that we work in lockstep as we proceed to try to solve this hopefully diplomatically".

Despite harsh economic sanctions and international pressure, Iran is refusing to abandon its nuclear programme, which it insists is purely civilian, and threatening Israel and the West. It is beginning to cause jitters in world capitals and financial markets. "Of course I worry that there will be a military conflict," Britain's Deputy Prime Minister, Nick Clegg, said in a magazine interview last week. He said Britain was "straining every single sinew to resolve this through a combination of pressure and engagement", rather than military action.

Is Israel bluffing? Israeli leaders have been claiming Iran is pursuing nuclear weapons since the early 1990s, and defence officials have issued a series of ever-changing estimates on how close Iran is to the bomb. But the sabre-rattling has become much more vocal. Last Friday, Defence Minister Ehud Barak claimed during a high-profile security conference that there was a "wide global understanding" that military action may be needed. "There is no argument about the intolerable danger a nuclear Iran [would pose] to the future of the Middle East, the security of Israel and to the economic and security stability of the entire world," Barak said.

A day earlier, visiting UN Secretary-General Ban Ki Moon implored Israel to find a peaceful solution to the standoff. Israel views Iran as a mortal threat, citing Iranian calls for Israel's destruction. At the weekend, Iran's Supreme Leader, Ayatollah Ali Khamenei, called Israel a "cancerous tumour that should be cut and will be cut".

Armed with a fleet of ultramodern US-made fighter planes and unmanned drones, and reportedly possessing intermediate-range Jericho missiles, Israel has the capability to take action against Iran, though it would carry risks. It would require flying over Jordan, Saudi Arabia, Iraq, Syria or Turkey. It is uncertain whether any of these Muslim countries would knowingly allow Israel to use their airspace.

With targets about 1600km away, Israeli planes would likely have the complicated task of refuelling in flight. Iran's antiquated air force, however, is unlikely to provide much of a challenge. Many in the region cannot believe Israel would take such a step without a green light from the US, its most important ally. That sense is deepened by the heightened stakes of a US election year and the feeling that if Israel acts alone, the West would not escape unscathed.

The US has been pushing both sides, leading the charge for international sanctions while also pressing Israel to give the sanctions more time to work. In recent weeks, both the US and European Union have imposed harsher sanctions on Iran's oil sector. Israeli officials want sanctions to be imposed faster and for more countries to join them.

Even a limited Israeli military operation could well unleash regionwide fighting. Iran could launch its Shihab 3 missiles at Israel, and have its local proxies, Hizbollah in Lebanon and Hamas in the Gaza Strip, unleash rockets. Israel's military intelligence chief, Aviv Kochavi, warned last week that Israel's enemies possess about 200,000 rockets.

Iran might also try to attack Western targets in the region, including the thousands of US forces based in the Gulf. An Israeli attack might have other unintended consequences. A European diplomat based in Pakistan said that if Israel attacks, Islamabad will have to support any Iranian retaliation. That raises the spectre of putting a nuclear-armed Pakistan at odds with Israel. To some, the greatest risk is to the moribund world economy. Analysts believe an Israeli attack would cause oil prices to spike, since global markets so far have largely dismissed the Israeli threats and did not "price in" the threat. A poll conducted by the Rapidan Group, an energy consulting firm in Bethesda, Maryland, said prices would surge by US$23 a barrel. The price of oil is about US$98 a barrel.

McNally said Iran could rattle oil markets by targeting oil fields in southern Iraq or export facilities in Saudi Arabia or Qatar and withhold sales of its own oil and natural gas from countries not boycotting. Iran also could attempt to carry out its biggest threat: to shut the Strait of Hormuz, the strategic waterway through which a fifth of the world's oil passes. That could send oil prices soaring beyond US$200 a barrel. But analysts note Iran's navy is overmatched.

If a surge in oil prices proved lasting, financial markets would probably plummet on concerns that global economic growth would slow and on the fear that any conflict could worsen and spread. Nick Witney, former head of the EU's European Defence Agency, said "the political and economic consequences of an Israeli attack would be catastrophic for Europe" since the likely spike in the price of oil alone "could push the entire EU, including Germany, into recession".

He said this could lead to "messy defaults" by countries like Greece and Italy, and possibly cause a collapse of the already-wobbly euro.

Oil disruptions or higher oil prices will also dent growth in Asia. China, India, South Korea and Japan all buy substantial amounts of Iranian crude and could face temporary shortages.

Why is the issue coming to a head with such unfortunate timing, with the US election looming and the global economy hanging by a razor's edge?

The urgency is fuelled by a belief in Israel that Iran is moving centrifuges and key installations deep underground combined with doubts about whether either Israel or the US have the bunker-busting capacity to act effectively.

At last week's security conference, Israeli Vice-Premier Moshe Yaalon, a former military chief, said all of Iran's nuclear installations are still vulnerable to military strikes. He appeared to contradict assessments of foreign experts and Israeli defence officials that it would be difficult to strike sensitive Iranian nuclear targets deep underground.

American officials acknowledge the current version of its bunker-buster bombs may not be able to penetrate Iran's heavily fortified underground facilities. The Pentagon is asking Congress to reprogramme about US$82 million in order to make the 13,600kg bunker-buster bomb more capable.

But US officials also say there are ways to disable the sites, such as targeting entrance and exit routes to an underground facility.