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The US stands to be branded the "Evil Empire" once more if its moves anger Russia or China, or if a third war breaks out in the Middle East. The volatile situation in Iran has become the first major challenge to US President Barack Obama. As it stands, it appears that his approach is significantly more acceptable internationally than the policies of George W Bush.

The current US administration has expressed solidarity with Iranian demonstrators after they took to the streets to protest against the June 12 general election. Iran is no longer considered a member of "the Axis of Evil", as it was under Bush.

Three million demonstrators are said to have come out to protest against the poll result, which they believed to be fraudulent, with scores being brutally crushed and killed in Tehran. The protesters came out in full force to support reformist candidate Mir Hussein Moussavi. To this day, sporadic protests and chants of "Death to dictators!" continue.

The US government has been reluctant to make a decision on what to do regarding the highly fluid situation in Iran. Before the election, Obama was trying to establish some sort of relationship with Tehran. This is in contrast to Bush, who treated this powerful nation with ridicule.

However, Obama's policy team never anticipated the massive protests, and the White House seems reluctant to criticise Mahmoud Ahmadinejad's "victory" and the resulting bloody handling of the protests.

Elsewhere, the uprising has drawn sympathy and support. Disturbing pictures of protester Neda Agha-Soltan being killed are now iconic images around the globe of the Iranian struggle.

Now that Iran's Supreme Leader Ayatollah Ali Khamenei has officially endorsed Ahmadinejad for a second term, Washington is finding itself caught in a Catch-22 scenario.

If the US government becomes too assertive, it will be seen by some Iranians as a renewed attempt to meddle in Iran's internal politics, something America was rightly blamed for in the 1950s when it worked with the British to depose the democratically elected government of Mohammed Mossadeq and replaced it with the Shah, who was eventually brought down in the 1979 revolution.

But if Obama doesn't act decisively enough, then he will be disappointing many Iranian lovers of freedom and democracy.

Last week New York Times columnist Roger Cohen wrote of his experience observing and covering the protest in Tehran: "Some protesters I met on the streets of Tehran pointedly asked me: 'Where's Obama?'."

In addition, as if the conundrum of democracy were not complicated enough, there's also the issue of a possible nuclear Iran.

Washington has given Tehran until September to engage in dialogue about its nuclear programme, but the clock is ticking fast, and observers are afraid of what might transpire in the Middle East if Israel should decide to launch a pre-emptive strike. This would plunge the whole Mideast into a whirlpool of conflict and violence.

What is Obama going to do, given that China and Russia might back Tehran? Already, Cohen observed, "Iran is awash in Chinese products - trade that boomed in recent years - and it supplies 15 per cent of China's oil."

This is almost like the China-Burma ties that enable the Burmese military junta to hang on to power, seemingly indefinitely.

Cohen, who is a close observer of Tehran-Washington affairs, said Iran's leaders knew that the United States had no stomach for a third war in the Middle East. Stories about broken families and a rising rate of suicide among US servicemen and women deployed in Iraq and Afghanistan are likely to influence decisions on foreign relations.

Still, some old habits die hard, and some low-brow newspapers couldn't help suggesting to Obama on Tuesday: "The US appropriately is standing back and allowing the crisis to play out. It mostly is a win-win scenario. If the moderates prevail, new doors may open. If the hard-liners crush the opposition, they will lose legitimacy in the eyes of their own people. But if the US meddles, it might ignite united opposition.

"That's not to say, however, the US can't exploit an adversary's moment of political weakness. It's an opportunity, for example, to step up efforts to split Syria from its alliance of convenience with Iran. More important, the destabilised regime might be more vulnerable to economic sanctions aimed at stopping Iran's nuclear programme."

So what should Obama's new policy on Iran be?

How can Washington appease both the rival forces in Iran while taking the fear of Israel into consideration, as well as the concerns and grievances of many in the Middle East, plus win support from China and Russia without being branded as the "Evil Empire" again?

This is a very tough challenge for Obama to overcome and will test both his resolve and his intelligence.