Washington today imposed sanctions on more than 20 Iranian companies, major banks and individuals, and the defence ministry.
The United States has also designated Iran's Revolutionary Guard Corps a proliferater of weapons of mass destruction and its elite Qods force a supporter of terrorism.
The move is an attempt to pressure Tehran to halt its nuclear programme and curb what the United States has described as terrorist activities.
Secretary of State Condoleezza Rice, who made the announcement, said the United States was committed to a diplomatic solution and urged Tehran to accept an offer made by major powers last year to give up sensitive nuclear work in exchange for incentives, including direct talks with Washington.
"We will be open to the discussion of any issue. But if Iran's rulers choose to continue down a path of confrontation, the United States will act with the international community to resist these threats," she said.
The sanction effectively bans international banks from doing business with Iran's biggest banks.
The United States accuses the elite Qods force of arming and training militants in Iraq who in turn attack US forces. It also says the Qods is providing "material support" for Hizbullah in Lebanon, the Taliban in Afghanistan and Hamas in the Palestinian Territories
This is the first time the United States sought to take such punitive measures against another country's military and is opposed by allies like Russia who believe dialogue rather than more punishment or military action is the way forward.