They made an awkward couple, despite the idyllic setting of a Red Sea resort. Colin Powell and Kamal Kharrazi, the top diplomats of two countries that severed relations under extreme circumstances a quarter of a century ago, were seated together, most unusually, at an evening reception. And yet they were well matched. Both the US secretary of state and the Iranian foreign minister had the authority to agree to the contrived seating plan for a regional security conference on Iraq that Egypt was hosting, but neither had the green light from his respective capital to go beyond formalities.
"During the course of dinner, the secretary and the Iranian foreign minister engaged in polite dinner conversation," a senior US official intoned, requesting anonymity because of the perceived sensitivity of the rare encounter.
That was last November, and now not even diplomatic chit-chat would get on the menu. Since then, the pragmatically inclined but lonely Powell has been replaced by Condoleezza Rice, the more ideologically committed confidante of President George W Bush. Bush's second administration, while proffering diplomatic olive branches to estranged allies in Europe, has put the Islamic republic on notice over its nuclear ambitions, condemned its support of anti-Israeli "terrorist" groups and told it to stop interfering in Iraq. Senior officials, led by Vice-President Dick Cheney, drop dark hints of possible military action by the US, Israel or both, should Iran move towards acquiring a nuclear weapon.
Meanwhile, the radical hardliners in Iran who have steadily marginalised Mohammad Khatami, the reformist president, are engaged in a more uncertain power struggle with Ali Akbar Hashemi Rafsanjani, his rather pragmatic predecessor and chairman of a key political council, in the run-up to fresh presidential elections this summer.
Iran's rulers are no less sensitive to the electorate than America's chosen leaders are to theirs - indeed more so, given the regime's essential lack of a popular base. Nationalism has long been the dominant force in Iranian politics, and it is not on the cards to make a substantial concession on the nuclear issue to the US without equal payback. Indeed, the Europeans involved in negotiating with Iran doubt there is a real willingness in Tehran to reopen direct talks with the US that were broken off nearly two years ago.
At her Senate confirmation hearing, Rice put Iran and North Korea among the six "outposts of tyranny" (alongside Belarus, Burma, Cuba and Zimbabwe). In the event, North Korea got off quite lightly in Bush's State of the Union address on 2 February, but not so Iran or Syria. "Today, Iran remains the world's primary state sponsor of terror, pursuing nuclear weapons while depriving its people of the freedom they seek and deserve," Bush said.
Was this presidential code for "regime change"? "No, the United States has been very clear, its officials have been very clear, that we do not have a policy of regime change towards Iran," replied Adam Ereli, a State Department spokesman, while stressing US support for the "aspirations" of freedom-loving Iranians. Rice, however, was not so clear. Before her recent tour of seven European capital cities, she said "all kinds of things are possible if Iran gets to a nuclear device that is usable". On the tour itself, she clearly evaded press questions about "regime change".
The confusion, US officials say privately, is not deliberate, but more the product of a policy that remains confused, amid conflicting interpretations of Iran's behaviour and the nature of its threat. As a result, the Bush administration has rejected EU exhortations to join the process of engagement with Iran. However, with no alternative of its own, it has come round to giving public backing to attempts by Britain, France and Germany to induce Iran to turn its "temporary" suspension of its nuclear fuel cycle programme into a permanent and verifiable cessation. This ambiguity has alarmed the three European countries, which fear they are being set up for a fall by hawks in Washington.
None the less Jack Straw, the UK Foreign Secretary, appeared confident enough in Washington's sincerity to not ask Rice about the US military option during his visit to Washington last month. A day later, Joschka Fischer, Germany's foreign minister, did raise the question. By then, a detailed report in the New Yorker magazine, only partially denied by the administration, had claimed that US units were carrying out covert surveillance operations inside Iran. But Fischer formed the impression that Rice shared the view of most defence analysts: military action against Iran is not doable and carries risks of retaliation in the region and beyond.
According to European officials who have discussed Iran in the White House with Elliott Abrams, the newly promoted deputy national security adviser, the central tenet of US policy is that it will not be party to anything that confers legitimacy on Iran's clerical rulers. There is a belief, despite more than two decades of frustrated hopes, that the theocratic regime is unstable and will collapse. Richard Perle, one of the neoconservative ideologues behind the Iraq war, believes a shove from the outside while supporting pro-democracy parties on the inside will help it on its way. These same neoconservatives were once confident that a secular democratic government, preferably led by Ahmad Chalabi, the Pentagon's favourite, would come to rule Iraq. Now they try to convince their dwindling audiences at Washington conferences that a clerically influenced Iraqi government, led by Shias formerly close to Iran, will be excellent news for the region and will pose an ideological counterweight to Tehran's mullahs.
Rice, some of her aides say, shares the neo-cons' vision of a free and democratic Middle East. But after the Iraq experience, she is sceptical about their policy prescriptions. Instead, drawing on her academic expertise in the cold war, she is looking to a longer process of erosion that starts with sanctions and support for opponents of the Iranian regime.
Given that China and Russia are likely to block UN sanctions against Iran - in the event of a breakdown in the nuclear talks with the EU - the US will turn to the G7 industrialised nations to support punitive measures. Even that is doubtful, however. Japan imports about 15 per cent of its oil from Iran and would want guarantees of alternative supplies. Furthermore, China and India, huge and growing rivals to Japan for new sources of energy, would be quick to pick up any slack.
Still, pressure from the Bush administration appears to be having some impact. BP announced it would not compete for further projects in Iran out of "sensitivity" to the US (where BP has major interests). The US giants Halliburton and General Electric soon followed suit, saying they would not take on new work through their foreign subsidiaries, which had used loopholes in the unilateral US sanctions to do business with Iran. Members of Congress are preparing legislation, including the proposed Iran Freedom and Support Act, to plug those loopholes, penalise foreign companies investing in Iran, put "regime change" on the agenda and provide funding to opposition groups. To their dismay, Reza Pahlavi, the Virginia-exiled son of the ousted shah, is among Iranians who have rejected funding.
Patrick Clawson, deputy director at the pro-Israel Washington Institute for Near East Policy, says the US must rally support for UN sanctions and not give in to wishy-washy Europeans. "The argument that the European negotiations hinge on whether Washington offers Iran a carrot," he says, "looks like a pre-emptive excuse for the likely breakdown of the EU-Iranian talks." Iran, which denies it has a nuclear weapons programme, and has pledged to open all nuclear-related facilities to UN inspectors, insists it will not give up what it calls its legal right to enrich uranium for its civilian reactors. In private, European officials say the best they can do is to buy time, perhaps to the end of the year.
Guy Dinmore is diplomatic correspondent in Washington for the Financial Times and its former correspondent in Tehran