(Reuters) - Iranian allegations that Zionists were inciting drug trafficking and Jewish religious law called for annihilation of gentiles prompted a sharp response from Israel on Wednesday which said Iran was governed by fanatical anti-Semites.

The verbal clash highlighted festering tension in an international stand-off over Tehran´s nuclear program.

A third round of nuclear talks between world powers and Iran 10 days ago failed to resolve the stalemate. With that process seemingly close to collapse, Israel renewed veiled threats of military action against Iranian nuclear production sites, which it deems a mortal threat.

While Iran and Israel have traded hostile rhetoric for years, the remarks at a United Nations global drug enforcement conference in Tehran by Vice President Mohammad Reza Rahimi seemed unusually inflammatory to Western delegates.

Speaking on Tuesday, Rahimi said the Talmud, or canon of Jewish religious law, "teaches them how to destroy non-Jews so as to protect an embryo in the womb of a Jewish mother", according to excerpts published by the Fars news agency.

He accused "Zionists", a term the Iranian government usually applies to Israelis and their Jewish supporters abroad, of inciting drug trafficking. "You cannot find a single addict among the Zionists," Rahimi said.

The New York Times, which covered the conference marking a U.N.- sponsored International Day against Drug Abuse and Illicit Trafficking, further quoted Rahimi as saying Zionists ordered gynecologists to kill black babies and that the Russian Revolution of 1917 was started by Jews - although none, he was also quoted as saying, died in it.

The speech, for which at least 10 Western diplomats were present, drew furious condemnation from Israel, which has been angered in the past by Iranian President Mahmoud Ahmadinejad´s description of the Nazi Holocaust as a lie.

"The fact U.N. representatives and European delegates still attend conferences in Tehran, at which the worst kind of anti-Semitism is sounded, lends legitimacy to the Iranian ayatollah regime," Israeli Foreign Minister Avigdor Lieberman said.

AGENDA

Iran´s government, he said in a statement, is "made up not of madmen but of fanatical, anti-Semitic people with an agenda, who have a detailed global plan including, as they say openly and forthrightly, the destruction of the State of Israel".

Widely assumed to have the Middle East´s only nuclear arsenal, Israel has hinted at pre-emptive war to prevent its arch-enemy from getting the atom bomb. Iran denies having any such designs, though its often secretive nuclear program has stoked foreign suspicion and drawn increasingly tough sanctions.

Lieberman likened Iran to Hitler´s Germany but said that, post- Holocaust, Israel would "not allow any Jew to be harmed".

He said the Islamic Republic, and any failure by the international community to curb its nuclear work, would be "a sure recipe for disaster and a threat to world peace".

The European Union´s foreign policy chief Catherine Ashton, who leads nuclear talks with Iran on behalf of six world powers, said Rahimi´s speech was anti-Semitic and "unacceptable".

"(Ashton) is deeply disturbed by racist and anti-Semitic statements made by Iranian First Vice-President Mohammad Reza Rahimi," spokeswoman Maja Kocijanic said.

"Such statements are unacceptable and should not be tolerated," she said.

A Western diplomat who was at the conference said Rahimi´s 10-minute address left him "really shocked and surprised".

"We´ve heard speeches like this before but this was so much worse than the usual rhetoric. This wasn´t about drugs. It seems the Iranians want to create an issue and are deliberately looking to stir things up," the diplomat told Reuters on condition of anonymity.

Israel reacted to the latest fruitless nuclear talks between six world powers and Iran with a well-seasoned message - sanctions must be intensified while the clocks ticks down towards possible military action.

A high-ranking Iranian general then warned that any Israeli military strikes on Iran´s nuclear program would bring about the collapse of the Jewish state.

No further negotiations were planned after the June 18-19 round in Moscow, and the European Union is to launch a total embargo on Iranian oil exports on July 1.

Alun Jones, spokesman for the Vienna-based United Nations Office on Drugs and Crime, said UNODC attended the Tehran conference as well as related events across the world on Tuesday, as mandated by the U.N. General Assembly, and that it could not anticipate what the Iranian hosts would say.

Jones added: "The drug trade is motivated by business and profit, not by ideological considerations, and also drug addiction is a health challenge which affects all people, of all kinds, of all race, of all creed and it is a health challenge that affects people in the same way."

(Additional reporting by Marcus George in Dubai, Fredrik Dahl in Vienna and Justyna Pawlak in Brussels; Editing by Jeffrey Heller and Mark Heinrich) (© Thomson Reuters 2012. 06/27/12)