EU foreign ministers have adopted tougher sanctions targeting Iran's energy sector, in an effort to block its controversial nuclear programme.
There are new restrictions on foreign trade, financial services and the oil and gas sectors - the backbone of Iran's economy.
Officials said the package was "by some way the most far-reaching sanctions adopted by the EU against any country".
Canada has also imposed sanctions against Iran.
Like the EU, Ottawa's measures are targeting Iran's energy and banking sectors.
In response, Iran said the sanctions would fail.
"Sanctions are not considered an effective tool... and they will only complicate the situation", Iranian foreign ministry spokesman Ramin Mehmanparast was quoted as saying by the country's state-run media.
In a separate development, Tehran told the International Atomic Energy Agency (IAEA) that it was ready to return to negotiations on a nuclear fuel swap, without conditions.
It was responding to international concerns over a plan announced by Iran, Brazil and Turkey in May, under which Iran would send low-enriched uranium to Turkey in return for high-enriched uranium for use as fuel for a research reactor.
The plan has already been rejected by the world's major powers.
Call for dialogue
Monday's moves by the EU and Canada came a month after the US strengthened its own sanctions against Iran.
The US and its allies accuse Tehran of seeking to develop nuclear weapons. Iran insists its nuclear programme is solely for peaceful purposes.
Last month, the UN Security Council approved a fourth round of sanctions against Iran over its nuclear programme, which directly targets the Islamic Revolutionary Guard Corps.
The Revolutionary Guards are involved in many industries, including car manufacturing and clothing, and control at least a third of the economy.
The new EU measures are banning the export to Iran of key equipment and technology for refining and for the exploration and production of natural gas.
New European investment in major sectors of the Iranian economy will also be banned. There will be restrictions on sales to Iran of any goods which could potentially have military applications.
Ships will be inspected if they are suspected of carrying illegal material.
There is expected to be tight scrutiny of Iranian banks operating in the EU. Any money transfers of more than 10,000 euros (£8,340) will have to be notified to national authorities, and amounts above 40,000 euros will require prior authorisation.
More than 40 individuals and more than 50 companies will be blacklisted.
The new measures will come into force in the coming days, after they are published in the EU's official gazette, EU officials say.
EU foreign policy chief Catherine Ashton said in Brussels that "the purpose of those sanctions is to persuade Iran, 'we need to discuss this issue, and move forward'".
"We want to see dialogue on nuclear weapons capability to start as soon as possible in order to reach an agreement,"
On Sunday, Iranian President Mahmoud Ahmadinejad warned the European Union against imposing sanctions, saying his country would cause it to "regret" the move.
Mr Ahmadinejad said that anyone who adopted hostile measures "should know that Iran will react swiftly".
Meanwhile a senior US official has told the BBC that sanctions against Iran are having a dramatic effect as private companies around the world refuse to do business with Tehran.
"We're seeing a lot of companies decline to invest in Iran's infrastructure and that is, when you think about it, one of the most important variables. Because, if they're unable to attract this investment, then long term their economy is in a very difficult situation," he said.
Speaking in Brussels on Monday, Sweden's Foreign Minister Carl Bildt said the EU was pursuing "a double-track policy" towards Iran.
"I have yet to meet anyone who thinks that this issue is going to be sorted out by sanctions... alone. So I think that we'll have to look at the different ways in which we can strengthen and emphasise the diplomatic track and there are, I hope, some possibilities along that road."