A defiant Iranian President Mahmoud Ahmadinejad vowed on Saturday to inaugurate ‘important nuclear projects’ within days and lashed out at Israel, saying the ‘story’ of the Holocaust underpinning its existence had been ‘smashed’.

In a speech marking the anniversary of Iran's 1979 Islamic revolution, Ahmadinejad said his nation will "never yield" to Western sanctions and threats of military action from Israel and the United States.

A crowd of an estimated 30,000 people in Teheran's main Azadi (Freedom) Square cheered Ahmadinejad's words despite the winter weather. Many, including exuberant high school students, held aloft placards declaring "Death to America" and "Death to Israel".

In pointed messages aimed at those two arch-foes, Iranian officials planted a full-scale model of a US spy drone captured in December at an entrance to the square, and hosted on the stage the Hamas prime minister of Gaza.

Hamas "will never recognise Israel," Gaza leader Ismail Haniya told the crowd just before Ahmadinejad spoke.

His remarks were likely to complicate efforts to form with rival party Fatah a Palestinian unity government in the face of strong opposition from the Jewish state, which views Hamas as a terrorist organisation armed by Iran.

Ahmadinejad gave no details about the "important nuclear projects" about to be made public.

However, the UN nuclear watchdog, the International Atomic Energy Agency (IAEA), has already said Iran is enriching uranium to 20 percent -- a level significantly closer to military-grade 90 percent purity -- at a mountain bunker near the Shiite shrine city of Qom.

And Iranian officials have said that they will be inserting their first domestically made 20-percent enriched fuel plate into a Tehran research reactor by March.

Both developments have unsettled the West and Israel, which suspect Iran is pursuing research into nuclear weapons despite its repeated denials.

An IAEA report in November said there was evidence of activities in Iran that relate to a militarised nuclear programme.

The United States and the European Union have ratcheted up economic sanctions on Iran to an unprecedented level to try to force it to halt the uranium enrichment and to re-engage in long-stalled talks.

Israel, voicing concerns that Iran could shield its nuclear programme from attack by the end of this year, has made comments suggesting it could imminently launch air strikes against its long-time enemy. The United States has also not ruled out military action.

But Ahmadinejad rejected the pressure, saying that, "if the language of bullying and insult is used, the Iranian nation will never yield."

He added: "The only path is to adhere to justice and the respect of Iran's (nuclear) rights and to return to the negotiating table."

Iran has said several times in recent months that it is ready to resume talks on its nuclear programme with world powers that collapsed a year ago.

But up to now it has failed to respond to a letter by EU foreign policy chief Catherine Ashton formally offering to return to those talks as long as Iran imposes no preconditions.

Iranian Foreign Minister Ali Akbar Salehi, in comments carried by media on Saturday, said his country's chief nuclear negotiator, Saeed Jalili, had written a reply to Ashton that "either has been sent or is on the verge of being sent."

He voiced optimism that another round of talks with Britain, China, France, Germany, Russia and the United States would begin "soon".

"They have some questions and ambiguities and we will try to answer these questions and ambiguities," he was quoted as saying.

Ahmadinejad used his speech to again question the veracity of the Jewish Holocaust, which he has in the past dismissed as a "myth".

He claimed the United States and the West had created "a story called the Holocaust" to create the Israeli state as part of a plan "to dominate the world".

But, he said, "the Iranian nation with courage and wisdom smashed this idol to free the people of the West (of its hold)."

He urged Western nations to stop supporting Israel.

"Why do you link your fate with this sham regime? Let Al-Quds (Jerusalem) and Palestine become free," he said. "Democracy doesn't come out of the barrel of a gun."

Iran denies Israel's right to exist and has said it will back any group trying to put an end to the Jewish state.

Iran's anniversary commemorations marked the day 33 years ago that a revolution led by clerics, students and dissidents overthrew the US-backed shah and installed an Islamic theocracy.

The United States cut off all diplomatic relations with Iran in 1980, after Islamic students stormed the US embassy in Tehran in November 1979 and took 52 Americans inside hostage for 444 days.

The US drone replica on display in Tehran was that of an unmanned stealth aircraft, a bat-winged RQ-170 Sentinel, which Iranian officials said they brought down by hacking its flight controls as it overflew their territory in December on a surveillance mission.

Representatives of foreign media were not allowed to circulate in the crowd commemorating the anniversary. State television showed tens of thousands of people coming out into the streets across the country.