For years, Iran’s hard-line leaders worked behind the scenes. Everyone knew the mullahs had all the power, but they allowed ex-President Mohammad Khatami (search), supposedly a reformer, to be the public face of Iran. That charade is over.

Mahmoud Ahmadinejad’s (search) installation as Iran’s new president is a triumph for Iran’s hardliners, who now openly control all the important levers of power. Ahmadinejad wasted little time in provoking a crisis. Two days after his inauguration, he reactivated Iran’s efforts to enrich uranium, which could be used to fuel a nuclear reactor or, as many suspect, to build a nuclear weapon.

A dedicated revolutionary who rose through the ranks of Iran’s Revolutionary Guards (search) -- the militant spearhead of the Iranian revolution -- Ahmadinejad puts a more assertive and uncompromising face on Iran’s foreign policy.

The Bush administration has correctly aligned the U.S. with the Iranian people in their efforts to build a true democracy. But it also has gone along somewhat with the Khatami charade.

Washington hasn’t demanded regime change in Iran. American policy is partly in deference to the European Union’s negotiations with Iran about its nuclear program. The EU has long believed it could talk Iran into giving up its nuclear ambitions, and the United States has been willing to allow the EU to try.

However, it’s clear that Iran is using the talks as cover while it builds its nuclear capabilities. So the U.S. should lead an international coalition to contain Iran and penalize it for its nuclear efforts and its continuing support of terrorism -- while quietly assisting Iran’s democratic opposition movement.

The U.S. and its allies should call for the U.N. Security Council to impose economic sanctions on Iran for taking steps to convert its civilian nuclear program to weapons purposes. Granted, China and Russia will seek to dilute or block sanctions due to their major trade and military ties to Iran. For that reason the U.S. will need to push the EU and Japan to impose sanctions outside the U.N. framework, including the denial of loans and foreign investment.

The EU and Japan will be difficult to convince. They prefer a business-as-usual policy toward Iran, especially at a time of high oil prices. But Washington must patiently and firmly press them to support a more robust containment policy, to counter the resurgence of Iran’s hardliners, Tehran’s support for terrorism and the growing threat of a nuclear Iran.

The United States should maintain a strong naval and air presence in the Persian Gulf to deter Iran and strengthen military cooperation with the Gulf States, which have been denigrated by Ahmadinejad as “filling stations.” Washington also should work with the Iraqi government to warn Iran against supporting radicals such as Moktada Sadr, who has led two bloody uprisings against the American presence in Iraq.

Until Iran stops supporting terrorism and halts its nuclear-weapons program, Washington should cooperate with other countries to deny Tehran loans from institutions such as the World Bank and deny Iran the funding for a proposed natural gas pipeline to India, via Pakistan. Until there’s a change at the top, any foreign investment is likely to end up supporting Iran’s anti-Western government.

The U.S. should discreetly aid all Iranian groups that support democracy and reject terrorism. That may take the form of direct grants, or indirect payments through nongovernmental organizations. Another way to frustrate the regime’s suppression of opposition newspapers, Internet blogs and other media is to increase Farsi broadcasts by the Voice of America, Radio Free Europe and other information sources. The free flow of information is an important precursor to the free flow of political ideas.

The Iranian people need to know about the activities of dissidents such as imprisoned journalist Akbar Ganji, now on a hunger strike, and the simmering discontent that triggered recent Kurdish riots. Such broadcasts would help underscore to the Iranian people the heavy price their government is forcing them to pay.

And if Iran continues to export terrorism and seeks to obtain nuclear weapons, Washington should not rule out military strikes to destroy its nuclear facilities.

Former President Khatami has warned about the potentially dangerous inclinations of the incoming government: “I pray to God that our friends would not make a mistake and misinterpret the people’s choice as their intention to return to extremism.”

The United States and its allies must make Iran’s hardliners understand: If they continue to seek nuclear weapons or export terrorism and subversion to their neighbors, they will be forced to pay a prohibitively high economic, political, diplomatic, and possibly military cost. This will give Iranians an additional incentive to rid themselves of a repressive regime that threatens its neighbors as well as its own people.

James Phillips is a research fellow in Middle Eastern studies at The Heritage Foundation.