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Iranian president Mahmoud Ahmadinejad is preparing to confront the US and United Nations security council over Iran's nuclear activities partly to distract attention from the country's worsening economic problems, sources in Tehran have said.

Iran's hardline government said it would respond by August 22 to a western compromise package designed to defuse the dispute over its nuclear activities. But diplomatic sources said that while expressing readiness to continue negotiations, Mr Ahmadinejad was opposing concessions on the issue, which has become key to maintaining his support following his disputed election victory one year ago.

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"People say it's Ahmadinejad who's the problem," a western diplomat said on Friday. "Even the Supreme Leader (Ayatollah Ali Khamenei) favours some kind of deal. But this is Ahmadinejad's flagship issue. People like the way he has stood up to the Americans and he isn't going to throw that away."

Leila, a Tehran resident who, like other interviewees, asked not to be identified, said: "If the US had not made such a big thing of the nuclear issue Ahmadinejad would have been in big trouble by now. He could have been overthrown. He's achieved nothing in the past year. The economy is very bad. Everyone is poor."

Ali, a graduate in part-time employment, said it was very difficult for young people to find good jobs in a country where two-thirds of the 70 million population are under 30.

"Ahmadinejad promised to do all sorts of things. But he hasn't done anything. He promised to share out the oil revenue. Look at the price of oil now! Where's all that money going? There's no economic management in this country. It's inefficient. It's corrupt," Ali said.

"Ahmadinejad loves all the international attention. He's making the most of the nuclear issue to distract attention from the failures of the economy."

A recent Zogby International/Reader's Digest poll, conducted by telephone from outside Iran, found strong public support for the government's position that Iran has an "inalienable right" to develop nuclear power for peaceful purposes. Sixty-seven percent also agreed with Mr Ahmadinejad that the state of Israel should not exist, with only 9% disagreeing.

But 41% of respondents said making the economy more efficient was more important than nuclear capabilities or regional issues, with 27% disagreeing.

The economy is coming under increasing public scrutiny despite official controls on newspapers and restricted access to the internet. An estimated 80% of all economic activity is under direct government control or managed through cooperatives known as bonyads, often dominated by well-connected clerics. In contrast, 80% of the population works in the private sector.

Critics say US sanctions, which have discouraged foreign investment and technology transfers, cannot be wholly blamed for Iran's economic backwardness. There are also complaints that taxpayers' money allegedly being sent to Hizbullah in Lebanon would be better spent at home.

Particular concern is focusing on oil-rich Iran's lack of refining capacity. It has a petrol shortfall of 30m litres a day, which is made up by expensive imports. Critics also note its failure to keep up with IT and e-commerce developments. A recent UN report ranked Iran 98th in the world in e-government.

The finance minister, Davood Danesh-Jafari, promised this week that privatisations ordered by Ayatollah Khamenei in 2004 would be speeded up. "We need to change the status quo," he said.

One plan is to offer discounted shares in the bigger state companies to the 8 million most needy Iranians, in line with Mr Ahmadinejad's redistributive "Islamic socialism". But the idea has hit trouble because few poor people have cash to spare to buy even discounted shares and the companies are usually making a loss.

"Since the privatisation process ... failed to produce the desired results, one question that arises is how the present administration intends to move forward in containing the role of the state," said a daring commentary published by Iran Daily.

"Mr Ahmadinejad and his aides have pledged to deliver and improve the quality of life of the millions who voted them to office. With oil revenue at its highest in almost three decades ... the nation hopes the economy will turn around without delay."