Victory in Iraq requires more than adjusting troop levels. It means quashing the violence stirred up by foreign powers.

That's what led President Bush earlier this week to issue a clear warning to the chief mischief-maker, Iran, that the U.S. "will respond firmly" to any further violent provocations from that quarter.

It's about time. We've long known that Iran finances terrorist and allied Shiite militia groups in Iraq, in some cases arming them with armor-piercing roadside bombs.

Iranian intelligence services also collaborate with Baathist insurgents attacking U.S. forces. Documents recently seized from an Iranian facility in the Kurdish region of Iraq detail how Iran's Islamic Revolutionary Guard has supplied insurgents with weaponry ranging from heavy machine guns to shoulder-fired surface-to-air missiles.

Those are ideal armaments for downing U.S. helicopters, and we've lost three of them in a matter of weeks. It's no stretch to suspect those Iranian weapons are responsible.

Why has Iran escalated the violence? Iran may anticipate stronger U.S. campaigns against its allies in the Shiite militias. Or, looking at the result of the American elections, it may be anticipating a wholesale withdrawal of U.S. forces that would leave a power vacuum for Iran to fill inside Iraq.

Either way, Iran is acting as if it's on a roll.

In addition to escalating the insurgency in Iraq, Tehran believes it has the upper hand in the protracted diplomatic sparring over its nuclear programs. Thumbing its nose at global objections, Iran recently announced plans to install 3,000 nuclear centrifuges to boost uranium enrichment. And still European leaders balk at taking tougher action through the United Nations.

Meanwhile, Tehran is quietly but steadily up-grading its arsenal. Last year, Iran tested an "ultra-horizon" missile that can be fired from helicopters and jet fighters. During military maneuvers last November that Iranians officially described as aimed at stopping "trans-regional powers" in the region, many other missiles were test-fired -- including the Shahab-3, which can reach Israel. The U.S. Missile Defense Agency says Iran is "likely to develop an ICBM/SLV" and could have an ICBM "capable of reaching the U.S. before 2015."

That's just a couple of presidential administrations away.

In the meantime, the Iranian threat is real and growing.  If Iran succeeds in forcing a premature withdrawal of U.S. troops from Iraq, the current government in Baghdad would surely fall, leading to even greater chaos and bloodshed. Iran would gain greater influence, if not outright dominance, of at least the Shiite southern region of Iraq.

An emboldened Iran also would jeopardize world access to Gulf oil and assure an even broader export of terrorism across the Middle East. Meanwhile, a likely intra-Islamic civil war would engulf the region and perhaps other parts of the Muslim world. The Saudis and other Sunni Arabs already are growing nervous over Iranian assertiveness.

So what should President Bush do?

For starters, the U.S. should press the European Union and Japan to impose the strongest possible economic sanctions outside the U.N. framework, especially restrictions on foreign investment. Trade and investment matter greatly to Tehran; it needs foreign investment to maintain a steady flow of oil revenues.

Current sanctions already seem to be working. Iranian critics of President Mahmoud Ahmadinejad complain that his confrontational approach is undermining their national interests. We must drive this increasingly unpopular leader further into his shell. That means ruling out direct talks, which would only enhance the embattled leader's status and give the world the false impression that he's someone we can do business with.

Instead we should launch public diplomacy initiatives to drive wedges further between Ahmadinejad's regime and the restive Iranian people. It's easy to find topics for such initiatives -- from the regime's human-rights abuses to its ties to terrorism. Our current public-diplomacy efforts have been disjointed and too much below the radar. We need to coordinate them better at the highest levels of government.

Muslim countries threatened by Iran's pursuit of Shiite dominance also need to be brought more into this strategy. Turkey and those Arab states who find Iran's belligerence destabilizing should pressure Iran more as well. And we should encourage our allies in the region to assist us in deploying missile defenses.

President Bush promises to stop Iranians from inflicting violence inside Iraq. This will take more than the occasional arrest of suspected Iranian intelligence officials or raiding arm caches. It requires beefing up Iraqi and U.S. forces to monitor and interdict known supply and infiltration lines from Iran.

If we can avoid the temptation to fold in Iraq, we might gain enough time to defeat the insurgents and prevent an even worse outcome -- a hegemonic Iran standing astride the heart of the Gulf and the Middle East.

Kim R. Holmes, Ph.D., is Vice President of Foreign and Defense Policy Studies and Director of the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.