By Jeffrey Heller
JERUSALEM (Reuters) - Israeli Prime Minister Benjamin Netanyahu denounced a nuclear deal with Iran as a historic mistake on Sunday that leaves the production of atomic weapons within Tehran's reach and said Israel would not be bound by it.
Having lost its battle against easing sanctions, Israel appeared to be charting a new strategy: intense scrutiny by its intelligence services of Iran's compliance with the interim agreement and lobbying for stronger terms in a final accord that world powers and the Islamic Republic are still pursuing.
The terms of the deal and re-engagement of the West with Iran, after a protracted, volatile standoff, are a setback for Netanyahu, who had demanded Iran be stripped of its nuclear enrichment capabilities altogether.
His military options in confronting Tehran now seem more limited and likely to risk Israel's isolation. A grim-faced Netanyahu said in a statement in English after meeting his cabinet that Israel would not be bound by the accord.
"What was concluded in Geneva last night is not a historic agreement, it is a historic mistake," he said.
"Today the world has become a much more dangerous place because the most dangerous regime in the world took a significant step towards obtaining the world's most dangerous weapon."
The United States said the agreement would arrest Iran's most sensitive nuclear work, including the construction of the Arak research reactor, which is of special concern for the West as it could produce plutonium for bombs.
"Israel is threatened by what has been going on in Iran," U.S. Secretary of State John Kerry told CNN.
"But I believe that from this day - for the next six months - Israel is in fact safer than it was yesterday because we now have a mechanism by which we are going to expand the amount of time in which they (the Iranians) can break out (toward making a nuclear bomb," Kerry said.
The deal provides for intrusive U.N. nuclear inspections and compels Iran to cease the stockpiling of uranium refined to a fissile concentration of 20 percent - a close step away from the level needed for weapons.
Iran, which says it is pursuing its nuclear program for peaceful purposes only, also promised to stop uranium enrichment above a low fissile purity of 5 percent.
Netanyahu said those terms left Israel's arch-enemy with little incentive down the line to dismantle its uranium-enriching centrifuges and plutonium reactor.
"Sanctions that took years to put in place are going to be eased. Iran is going to receive billions of dollars' worth of sanctions relief," he said. "So the pressures on Iran are being lifted, they are being eased, and with the lifting of this pressure, this first step could very well be the last step."
Netanyahu repeated his long-standing threat of possible military action against Iran - even as a member of his security cabinet acknowledged the interim accord restricted that option.
"The regime in Iran is committed to destroying Israel. And Israel has the right and the obligation to defend itself by itself from any threat," Netanyahu said. "I would like to make clear, as the prime minister of Israel: Israel will not allow Iran to develop a military nuclear capability."
A senior U.S. official said President Barack Obama would discuss Israel's misgivings with Netanyahu on Sunday.
Israeli stock prices rose to a record high on Sunday in response to the deal.
"Israeli investors see a lower risk of conflict despite what politicians have to say," said Roni Biron, senior analyst at UBS Israel. "Investors are reading ... that this is a positive agreement."
Iranian President Hassan Rouhani, a relative moderate elected by a landslide in June, has called for "constructive interaction" with the world and avoided the belligerently anti-Israel rhetoric of hardline predecessor Mahmoud Ahmadinejad. But Iran's clerical supreme leader, Ayatollah Ali Khamenei, referred to Israel as a "rabid dog" in a speech on Wednesday.
Civil Defence Minister Gilad Erdan, a security cabinet member, said the nuclear deal "makes it much more difficult, in the diplomatic sphere, to talk about a military option".
Israel's coming steps, Erdan said on Army Radio, would be to continue monitoring events in Iran along with an attempt to coordinate future moves with the United States and the other five powers that sealed Sunday's deal.
Security sources said Netanyahu has urged Israel's intelligence organs to spare no expense in crafting assessments of the situation in Iran and weighing Israel's options.
"We have six months now, and there are significant improvements that can be made in these six months," Erdan said, looking ahead to a final agreement.
Uzi Rabi, head of the Moshe Dayan Center for Middle Eastern Studies at Tel Aviv University, said Israel's immediate options were unlikely to include a military attack.
Instead, he said, "Israel should focus on a concerted intelligence effort" to expose any violations of the deal.
In the run-up to the interim agreement, Israel took its concerns to the U.S. Congress, where support for the Jewish state and increased U.S. sanctions has long been strong.
Economics Minister Naftali Bennett, who was in Washington last week, met U.S. legislators and said he warned them of an arms race by Sunni Muslim Arab countries, including Saudi Arabia, if Shi'ite Muslim Iran did not dismantle enrichment.
Israeli Foreign Minister Avigdor Lieberman played down disagreements with Washington, Israel's main arms supplier and supporter, over the Iranian issue. Asked on Israel Radio if he felt betrayed by Israel's most important ally, he said: "Heaven forbid."
(Additional reporting by Dan Williams, Maayan Lubell and Steven Scheer; Editing by Mark Heinrich and Patrick Graham)