Ahmadinejad was speaking a day after U.S. Secretary of State Hillary Clinton sought oil giant Saudi Arabia's support to help win Chinese backing for additional sanctions. Clinton said a new round of sanctions should target Iran's Revolutionary Guards.
"Iran will retaliate … of course, if somebody acts against Iran our response will definitely be firm enough … (to) make them regretful," Ahmadinejad told a news conference, without elaborating. "Sanctions will not harm Iran."
In Washington, the White House on Tuesday would not rule out any options — including a military option — for dealing with Iran's nuclear ambitions.
"I wouldn't rule out anything," White House spokesman Robert Gibbs told a news briefing, adding that Iran's refusal to engage on its nuclear program was proof that the program "is not of the means and type that they have tried to convince others that it's for."
A joint letter from the United States, Russia and France expressed concern about Tehran's nuclear work and said its decision to escalate uranium enrichment — rather than implement a nuclear fuel swap — was unjustified.
Ahmadinejad said talks were still under way on the proposed fuel exchange and the issue was not yet closed.
He did not give details, but Turkish Foreign Minister Ahmet Davutoglu was visiting Tehran on Tuesday to try to salvage the U.N.-brokered uranium exchange deal amid growing calls for new sanctions against Iran.
"We have passed our own original proposals. We have brought up some ideas to unlock the impasse," Turkish Foreign Ministry spokesman Burak Ozugergin told Reuters in Ankara.
The State Department said it was not aware that any talks were under way, and repeated that any negotiations would have to take place with the International Atomic Energy Agency (IAEA), which brokered the fuel swap proposal.
"That is what is on offer. There are no new offers out there," State Department spokesman Gordon Duguid told a news briefing.
Western powers had hoped the IAEA proposal would result in Iran sending most of its low-enriched uranium abroad for processing and ease their concerns that it might build a nuclear bomb.
Iran, the world's fifth-largest crude exporter, says its nuclear program is solely to generate electricity so it can export more of its oil and gas.
"The case is not yet closed … we have already announced that we are ready for a fuel exchange within a fair framework. We are still ready for an exchange, even with America," Ahmadinejad said. But he added that such a swap should take place inside Iran, a likely non-starter for the West.
His order last week to start production of higher-grade uranium, rather than agree to the U.N.-brokered swap proposal, exposed Tehran to new calls for U.N. sanctions.
"WHOLLY UNJUSTIFIED"
The Kremlin said on Tuesday Iran could face sanctions if it failed to allay international fears about its nuclear program, and Israeli Prime Minister Benjamin Netanyahu, on a visit to Moscow, called for "paralyzing sanctions" on Iran.
The joint letter from the United States, Russia and France, obtained by Reuters on Tuesday, said Iran's move to escalate uranium enrichment was unjustified because the draft nuclear fuel deal lists guarantees for Tehran's benefit.
"(This) is wholly unjustified … If Iran goes forward with this escalation, it would raise new concerns about Iran's nuclear intentions," the letter to the IAEA said.
It said the plan for Iran to swap enriched uranium for nuclear medicine fuel had legal assurances it would be fulfilled, contrary to Iran's assertions.
Ahmadinejad said Iran had been willing to send its uranium abroad rather than enrich it further at home, but that it had "found that there is no goodwill in this regard."
He dismissed Clinton's accusations that Iran was moving toward a military dictatorship. The U.S. military budget was 80 times larger than that of the Islamic Republic, he said.
"We don't take her comments seriously," Ahmadinejad said.
He said Iran was not worried about sanctions targeting its gasoline imports as the country could become an exporter of the fuel. "There are several refineries under construction … and as soon as they become operational we can even export gasoline."
"They (the United States) imagine that they can prevent Iran's oil exports and it is just dreaming. They are not able to do that," he said, saying the United States should instead cooperate constructively with Iran. "The only opportunity they have is to use Iran's capabilities."
(Additional reporting by Fredrik Dahl and Hossein Jaseb in Tehran, Mark Heinrich in Vienna, Zerin Elci in Ankara, Steve Holland and Ross Colvin in Washington; Editing by Dominic Evans and Eric Walsh)
