by Angus MacKinnon

BRUSSELS, April 11 (AFP) - The European Union on Friday began reviewing its relations with Iran but looked set to resist US-led calls for a tough response after the Tehran regime was implicated in the 1992 murder of Kurdish dissidents on German soil.

As Iranian President Ali Akbar Hashemi Rafsanjani warned that Germany would "suffer" for Thursday's ruling by a Berlin court, EU governments distanced themselves from moves to downgrade diplomatic ties to Iran or impose any form of sanctions.

The EU agreed on Thursday to suspend the bloc's five-year-old "critical dialogue," with Iran, a policy of engagement that has been repeatedly criticised by the United States, and to recall their ambassadors in Tehran for consultations on possible further measures.

On Friday however the united front around even these initial steps began to crumble, casting doubt on the chances of further action being agreed.

Germany, France and Italy, the strongest backers of the policy of engagement, stressed that the critical dialogue had only been suspended, not abandoned definitively.

But Britain, which has led calls for a "firm" response to the Berlin ruling, insisted Iran would have to make concessions for normal relations to be resumed.

"For the suspension to be ended there has to be an improvement in Iranian behaviour," said a Foreign Office spokesman.

Britain also highlighted Friday its expulsion of suspected Iranian intelligence officials in 1992 and 1994, signalling London's belief that France and Germany have failed to crack down on Iranian operatives working from embassies in Paris and Bonn.

Privately, British officials said they would like to see other EU governments impose strict restrictions on the sale of arms or nuclear technology to Iran, as Britain already has.

Canada on Friday also recalled for consultations its ambassador to Iran.

Canadian Foreign minister Lloyd Axworthy expressed his "deep concern" saying that "this verdict is being carefully reviewed by the Canadian government."

Axworthy added that "it is not acceptable that Iran or any other country attack an opponent on foreign soil."

Austrian Foreign Minister Wolfgang Schussel also insisted the critical dialogue was "finished," while warning against breaking off relations.

France said it would oppose any kind of sanctions. "In general, embargoes do not seem to us to be an appropriate measure," said chief foreign ministry spokesman Jacques Rummelhardt.

A Scandinavian diplomat said Germany's reluctance to see the dispute with Tehran escalate meant anything beyond symbolic protests was unlikely.

"If Germany does not want to take any tougher measures it will be difficult for other countries to make the case for them," he said.

The situation was only likely to change if anti-German protests in Iran spilled over into direct attacks on EU citizens there, he added.

Swedish Foreign Minister Lena Hjelm Wallen called for a fundamental rethink of how the EU can put pressure on Iran to respect human rights and stop promoting terrorism.

"By its flagrant breach of international law, Iran has demonstrated that no progress can be made under the critical dialogue," she said.

Greece meanwhile broke ranks with its EU partners by saying it had no plans to recall its ambassador.

"The isolation of Iran is not the best way to protest," said government spokesman Dimitris Reppas.

The German defence ministry said it was "surprised" by the Greek decision.

Germany's determination to maintain links with Iran is seen as being linked to its significant trading ties with the regime. German exports to Iran were worth 1.1 billion dollars last year, more than twice the level of any other EU country.

Iran's ambassador to Italy, Radjavi Hedayatzadeh, was summoned to the foreign ministry, the ministry said, adding that its ambassador to Tehran would be recalled temporarily for consultations.

Bonn meanwhile said New Zealand was also going to recall

its ambassador to Tehran, according to a statement from the German foreign ministry after their respective foreign ministers, Klaus Kinkel and Don McKinnon, met.

A weak EU response to the Berlin court ruling is likely to exacerbate tensions with the United States over how to deal with "rogue" states like Iran and Libya.

The EU remains firmly opposed to US legislation that threatens sanctions against oil companies that make new investments in these two countries. Diplomats admitted however that the Berlin verdict had vindicated US claims that Iran was involved in sponsoring terrorism.

Meanwhile the judge who made the ruling, Frithjof Kubsch, was hiding at a secret location with his family, heavily protected by police.

He left the court in Berlin on Thursday in an armoured vehicle. Berlin newspapers praised him for his courage in making the ruling despite fears of death threats.