Analysts believe Tehran's claims of military and nuclear prowess are intended to strengthen its hand as it prepares to re-engage in nuclear talks.
US offers talks to end nuclear stand-off as Iran unveils stealth jet
The United States has offered direct talks with Iran to resolve the stand-off over its nuclear ambitions.
But Joe Biden, the US vice president, insisted Tehran must show it is serious because Washington would not engage in such contacts "just for the exercise".
His offer came on the same day that Iran's president, Mahmoud Ahmadinejad, trumpeted a military breakthrough by unveiling what he boasted was a domestically built stealth fighter jet, codenamed Qaher, or Conqueror.
Iran said only a few days ago it was planning to vastly increase the pace of its uranium enrichment programme with a new generation of advanced, home-built centrifuges.
Many analysts believe Tehran's claims of military and nuclear prowess are intended to strengthen its hand as it prepares to re-engage in nuclear talks with six world powers that have been stalled since last summer.
Mr Biden told an international security conference in Munich that "there is still time, there is still space for diplomacy", although he did not specify a time frame.
"The ball is in the government of Iran's court" to show it is negotiating in good faith, he said.
Iran is keen to be seen entering expected new talks with the so-called P5+1 - comprising France, China, Russia, the UK and the US, as the five permanent members of the United Nations Security Council, and Germany - on an equal footing.
Tehran rejects any suggestion it will make concessions because its economy has been battered by unprecedented US-led sanctions on its vital oil and banking sectors.
Mr Biden described those sanctions as the "most robust" in history. "But we have also made clear that Iran's leaders need not sentence their people to economic deprivation and international isolation," he said.
Russia, a nominal ally of Iran, welcomed Mr Biden's remarks, as did Germany, whose foreign minister, Guido Westerwelle, said 2013 would be "decisive" for hopes of a diplomatic solution.
Mr Biden underlined that US policy was not containment but "to prevent Iran acquiring a nuclear weapon". Implicit in that remark was a repeated warning by the US that it will use military force as a measure of last resort. Tehran insists its nuclear programme is solely peaceful.
Washington and Tehran are divided by more than three decades of institutionalised mistrust. Iran's supreme leader, Ayatollah Ali Khamenei, is seemingly convinced that US is using the nuclear issue as a means to bring about regime change in Tehran.
At the same time, experts say, Tehran knows that only direct talks with the US will give Iran the security guarantees in exchange for curbing its nuclear programme..
In November, a key aide to Mr Khamenei, Mohammad Javad Larijani, memorably declared Iran would open negotiations with the US "even at the bottom of hell" if that were in Tehran's interests.
But Iran now appears to be focused on domestic issues, with presidential elections in June.
"So Tehran might not be ready to deal with the US for several months," said Scott Lucas, an Iran expert at Birmingham University in England. "Western powers also seem to accept there will be no substantial talks until a new Iranian government is inaugurated in August."
Mr Biden's qualified olive branch to Iran came as the departing US secretary of state, Hillary Clinton, said Tehran had stepped up its military and financial aid to the Syrian government. One of Iran's "highest priorities" was keeping president Bashar Al Assad in power, she said.
In turn, Iran expressed hopes that her successor, John Kerry, will "rectify" the US government's "anti-Iranian stance and policies".
Meanwhile, Iran's claims to have hurtled a monkey into space last week - as a precursor to manned space flight - are being called into question by before and after pictures of the simian astronaut that appeared to show two different animals.