(Adds report of sanctions to be announced on Thursday)

By Sue Pleming and Susan Cornwell

WASHINGTON, Oct 24 (Reuters) - U.S. Secretary of State Condoleezza Rice said on Wednesday the United States would cut off Iran's "malignant" activities in Iraq and was working urgently to impose more punitive measures against Tehran.

Speaking to the House of Representatives Foreign Affairs Committee, Rice said Washington was looking closely at "new designations" against Tehran, which the United States accuses of fomenting violence in Iraq and pursuing an atomic bomb.

"One of our best levers, and it is a really simple proposition, Iran should not be able to use the international financial system to move its ill-gotten gains from proliferation or terrorism around the world," Rice said.

"We are working very urgently to get some of that ready," she said of new sanctions against Iran.

Rice did not provide details of when or what might be imposed. But U.S. officials say the Bush administration is very close to imposing restrictions on the elite Qods Force of the Iranian Revolutionary Guard Corps, which the United States accuses of arming and training militants in Iraq.

The Washington Post reported that Rice and Treasury Secretary Henry Paulson would jointly announce a package of unilateral sanctions against Iran on Thursday.

Citing U.S. officials, the newspaper said the sanctions will empower the United States to financially isolate a large part of Iran's military and anyone inside or outside Iran who does business with it.

The measures could affect hundreds of foreign companies by squeezing them to drop Iranian business or risk U.S. sanctions, the paper said.

JEOPARDIZING SECURITY

Demonstrators greeted Rice with screams of "war criminal" and one woman waved her blood-colored hands in Rice's face before she was shoved away by police and the group was removed from the hearing room.

In her prepared testimony, Rice said Iran was jeopardizing the security and prosperity of its neighbors by supporting extremist forces across the region.

"Iran is supporting select Shia militants in Iraq who kill innocent Iraqi civilians, Iraqi security personnel and coalition forces," she said.

"We are determined to cut off Iran's malignant activities in Iraq by apprehending and eliminating Qods Force members and other actors who endanger human life and overall national stability."

Iran strongly denies it has destabilized Iraq and says it is the actions of the United States that have led to chaos in its neighbor.

Rice said Iran also provided support to the militant group Hezbollah in Lebanon, Hamas in the Palestinian Territories and the Taliban in Afghanistan.

The United States is pushing the U.N. Security Council to impose a third round of sanctions against Iran over its nuclear program, which Tehran says is for civilian power use and the West says is aimed at building a nuclear bomb.

Rice said the combination of terrorism, Iran's own domestic politics and the pursuit of nuclear weapons was a "very dangerous mix" and the United States would push hard for a third U.N. sanctions resolution.

Russia and China are lukewarm to further punitive measures against Iran and Moscow has said dialogue rather than sanctions or military action is how to deal with Tehran.

Rice reiterated the U.S. position that diplomacy was the way forward: "The president has been very clear, that while he doesn't take any options off the table, he is committed to a diplomatic course on Iran."

Rice said it was unclear what Tehran's change from Ali Larijani as nuclear negotiator to the more hard-line Saeed Jalili meant for Iran's approach to the nuclear issue. (With reporting by JoAnne Allen)

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