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On Oct. 15, Iran issued a stinging public ultimatum to its arch-enemy Israel: Halt your onslaught on Gaza or we'll be forced to take action, its foreign minister warned.

Only hours later, the country's U.N. mission softened the hawkish tone, assuring the world that its armed forces wouldn't intervene in the conflict unless Israel attacked Iranian interests or citizens.

Iran, a longtime backer of Gaza's rulers Hamas, finds itself in a quandary as it tries to manage the spiralling crisis, according to nine Iranian officials with direct knowledge of the thinking within the clerical establishment.

Standing on the sidelines in the face of an all-out Israeli invasion of Gaza would significantly set back an Iranian strategy for regional ascendancy pursued for over four decades, according to the people, who asked to remain anonymous due to the sensitivity of the discussions in Tehran.

Yet any major attack against a U.S.-backed Israel could exact a heavy toll on Iran and trigger public anger against the clerical rulers in a nation already mired in an economic crisis, said the officials who outlined the various military, diplomatic and domestic priorities being weighed by the establishment.

Three security officials said a consensus had been reached among Iran's top decision makers, for now: Give their blessing for limited cross-border raids by its Lebanese proxy group Hezbollah on Israeli military targets, over 200 km away from Gaza, as well as low-level attacks on U.S. targets by other allied groups in the region. Prevent any major escalation that would draw Iran itself into the conflict.

"We are in contact with our friends Hamas, Islamic Jihad, and Hezbollah," Vahid Jalalzadeh, the head of parliament's National Security Committee said on Wednesday, according to Iranian state media. "Their stance is that they do not expect us to carry out military operations."

Iran's foreign ministry didn't respond to a request for comment about the country's response to the unfolding crisis, while Israeli military authorities declined to comment.

It's a high-wire act for Tehran.

The loss of the power base established in the Palestinian enclave via Hamas and allied group Islamic Jihad over three decades would puncture those plans, which have seen Iran build up a network of armed proxy groups across the Middle East, from Hezbollah in Lebanon to the Houthis in Yemen, the sources said.

Iranian inaction on the ground could be perceived as a sign of weakness by those proxy forces, which have been Tehran's principal weapon of influence in the region for decades, according to three officials. They said it could also dent the standing of Iran, which has long championed the Palestinian cause against Israel, a country it refuses to recognise and casts as an evil occupier.

"The Iranians are facing this dilemma of whether they are going to send Hezbollah to the fight in order to try to save their arm in the Gaza Strip or maybe they are going to let go of this arm and give it up," said Avi Melamed, a former Israeli intelligence official and a negotiator during the first and second intifadas.

"This is the point where the Iranians are," he added. "Calculating their risks."

'SURVIVAL IS UTMOST PRIORITY'

Iran's strategic goals are countered by immediate military considerations as Israel - responding to Hamas' devastating attack on Oct. 7 that killed 1,400 Israelis - has unleashed an aerial blitz on Gaza, killing at least 4,300 people.

Israel - a major military power - is widely believed to have its own nuclear arsenal, though it will neither confirm nor deny this, and has the support of the United States, which has moved two aircraft carriers and fighter jets to the eastern Mediterranean, partly as a warning to Iran.

"For Iran's top leaders, especially the supreme leader (Ayatollah Ali Khamenei), the utmost priority is the survival of the Islamic Republic," a senior Iranian diplomat said.

"That is why Iranian authorities have used strong rhetoric against Israel since the attack started, but they have refrained from direct military involvement, at least for now."

Since Oct. 7, Hezbollah has exchanged fire with Israeli forces along the Lebanese-Israeli frontier in clashes that have killed 14 of the Islamist group's fighters.

Two sources familiar with Hezbollah's thinking said the low-level violence was designed to keep Israeli forces busy but not open a major new front, with one characterising the tactic as waging "small wars".

Hezbollah leader Sayyed Hassan Nasrallah, who is known for issuing threats against Israel in speeches, has not given a public address since the crisis began.

Three senior Israeli security sources and a Western security source told Reuters that Israel didn't want a direct confrontation with Tehran and that while the Iranians had trained and armed Hamas, there was no indication that they had prior knowledge of the Oct. 7 attack.

Khamenei, the supreme leader, has denied Iran was involved in the attack, though he praised the damage inflicted on Israel.

The Israeli and Western security sources said Israel would only attack Iran if it was directly attacked by Iranian forces from Iran, though cautioned that the situation was volatile and an assault on Israel from Hezbollah or Iranian proxies in Syria or Iraq that caused heavy casualties could change that calculus.

A miscalculation by Iran or one of its allied groups in gauging the scale of a proxy attack could change Israel's approach, one of the Israeli sources added.

'NO U.S. BOOTS ON THE GROUND'

U.S. officials have made it clear their aim is to prevent the conflict from spreading and to deter others from attacking American interests while keeping Washington's options open.

On his way back from a visit to Israel on Wednesday, President Joe Biden bluntly denied an Israeli media report saying that his aides had indicated to Israel that if Hezbollah initiated a war, the U.S. military would join the Israeli military in fighting the group.

"Not true," Biden told reporters during a refuelling stop at Germany's Ramstein Air Base

about the Israeli report. "That was never said."

White House national security council spokesman John Kirby reiterated that Washington wanted to contain the conflict.

"There's no intention to put U.S. boots on the ground in combat," he told reporters during the refuelling stop.

Jon Alterman, a former State Department official who now heads the Middle East program at the CSIS think-tank in Washington, said Iranian leaders would feel pressure to show tangible, and not just rhetorical, support for Hamas but warned of the potential for events spinning out of control.

"Once you get into this environment, things happen and there are consequences that nobody wanted," he added.

"Everybody is on edge."

The crisis has also added to uncertainty in financial markets in America and beyond, boosting demand for "safe-haven" assets like gold, U.S. government bonds and the Swiss franc. The market reaction has so far been muted, though some investors warn that would change dramatically if the Gaza war escalated into a broader regional conflict.

'NEITHER GAZA NOR LEBANON'

A China-brokered reconciliation between regional rivals Iran and Saudi Arabia has further complicated matters for leaders in Tehran who want to avoid jeopardizing that "fragile progress", according to a former senior official who is close to top decision-makers in Iran.

Meanwhile, the Iranian people themselves could play a role in events unfolding across the region.

Iran's rulers can't afford a direct involvement in the conflict while struggling to quell mounting dissent at home, driven by economic woes and social restrictions, two separate officials said. The country's has seen months-long unrest triggered by the death in custody of a young woman last year and the state's persistent crackdown on dissent.

The economic woes, caused chiefly by crippling U.S. sanctions and mismanagement, have led many Iranians to criticize the decades-long policy of channelling funds to its proxies to expand the Islamic Republic's influence in the Middle East.

The slogan "Neither Gaza nor Lebanon, I sacrifice my life for Iran" has become a trademark chant in anti-government protests in Iran for years, underscoring the people's frustration with the establishment's allocation of resources.

"Iran's nuanced position emphasizes the delicate balance it must maintain between regional interests and internal stability," said the former senior Iranian official.

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