Although the Security Council has the power to impose sanctions on Iran, that option is strongly opposed by veto-wielders Russia and China, and won't be initially sought by the U.S. and its allies. Instead, the Security Council will likely issue some form of ultimatum for Iran to comply with IAEA demands within a given time frame the U.S. is believed to want a 30-day deadline followed by a further resolution threatening action after that.
Still, the Bush Administration hopes the Iranians, confronted with the prospect of UN action, will buckle and accept the Western insistence that Iran cannot be permitted to enrich uranium on its own soil (because this technology and industrial capacity would allow it also to create the fissile fuel necessary for a nuclear weapon). If Tehran remains defiant, the U.S. and its allies have an uphill task of persuading a reluctant international community to impose sanctions, or else consider some form of military strike that risks provoking a catastrophic backlash without even necessarily guaranteeing the elimination of Iran's nuclear activities.
But defiance carries a cost for Iran, too: Ultimately, the regime's survival may depend less on its ability to build a nuclear weapon than on its ability to create the jobs for which millions of Iranians are desperate, and a confrontation with the West will deprive Tehran of the foreign trade and investment essential to growing its economy.
Diplomatic solutions, by nature, have to allow both sides to claim some sort of victory, and the best contender had looked to be a Russian proposal to enrich uranium for Iran's reactors on Russian soil. Iran was always iffy about that proposal, but when Russia sought to sweeten the deal by allowing for some limited enrichment for research purposes in Iran, the U.S. balked. (Permitting any enrichment activity would allow Iran to perfect its techniques, and also provide it with cover for procuring nuclear technology that could aid a bomb program.) Once it became clear that the U.S. wouldn't buy it, Moscow abandoned the plan: Russia's objective, after all, is to find a fix that averts a confrontation.
The more the confrontation escalates, of course, the harder it will be to find a face-saving formula to allow Iran to back down. The regime in Tehran has wide popular support for its nuclear stand, and it is likely to offer to accept expanded IAEA monitoring of all its activities as a means of allaying Western fears. But right now the U.S. and its allies don't appear likely to accept anything short of a suspension of all enrichment-related activities.
With both Tehran and the Western allies now committed to mutually exclusive positions, and the matter headed for the Security Council, the role of Russia and China becomes decisive. Moscow and Beijing are ultimately aligned neither with the West nor with Tehran, and their economic interests in Iran and a range of economic and diplomatic ties with the West give them an overwhelming incentive to find a formula acceptable to both sides.