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WASHINGTON A proposal the Trump administration is considering to designate Iran's Islamic Revolutionary Guard Corps a terrorist organization has stalled over warnings from defense and intelligence officials that the move could backfire, according to officials familiar with the matter.

"If you do that, there is no way to escalate, and you would foreclose any possibility of talking to the Iranians about anything," one of the officials said, speaking on the condition of anonymity.

Momentum behind a possible presidential order has slowed amid an internal debate that has included concerns it could undermine the fight against Islamic State, draw opposition from key allies, torpedo any U.S.-Iran diplomatic prospects, and complicate enforcement of the Iran nuclear deal, U.S. and European sources said.

The proposal - part of a broader effort to make good on President Donald Trump's vow to take a tougher line against Iran - would, if implemented, take the unprecedented step of blacklisting the entire IRGC as a "Foreign Terrorist Organization."

That would go far beyond the targeted sanctions already imposed on individuals and entities linked to the IRGC, Iran's most powerful security force, which also controls large swathes of the Iranian economy and wields great political influence.

The proposal has been in the works for weeks, and was originally expected to be rolled out this month. But while the idea remains under consideration, it is unclear when or even if an announcement might be forthcoming, according to the sources, who spoke on condition of anonymity.

The White House did not immediately respond to a request for comment. Iran denies any involvement in terrorism, though it is listed by the State Department along with Syria and Sudan as a state sponsor of terrorism.

A decision on the matter was complicated by the Feb. 13 resignation of Trump's national security adviser, Michael Flynn, over disclosures that he discussed U.S. sanctions on Russia with the Russian ambassador before taking office. Flynn was one of the Trump White House's leading Iran hawks, and was spearheading the crafting of a strategy for confronting Tehran.

DEFENSE, INTELLIGENCE OFFICIALS RAISE OBJECTIONS

Even before Flynn's departure, however, officials from the Pentagon and U.S. and foreign intelligence agencies had raised objections to naming the IRGC a terrorist group.

Such a move would be the first time the 1996 Foreign Terrorist Organizations law, which has been applied to militant groups such as al-Qaeda and Islamic State, has been wielded against an entire institution of a foreign government, potentially subjecting it to a wide range of U.S. sanctions.

It likely would complicate the U.S. fight against Islamic State in Iraq and Syria, defense and other officials said, also speaking on the condition of anonymity. Shi'ite militias backed by Iran and advised by IRGC fighters are battling Sunni jihadist groups there, putting them on the same side as American forces.

It could encourage Iranian-backed forces in Iraq and Syria to curtail action against Islamic State and possibly even sponsor actions against U.S.-backed or American forces in Iraq, one official said. The Revolutionary Guards answer to Iranian Supreme Leader Ayatollah Ali Khamenei.

Naming Iran's most influential military force a terrorist group also could further inflame proxy conflicts elsewhere, including in Yemen, that the United States and its regional allies say Iran is fueling, the officials said. Iran denies those allegations.

"That move could potentially backfire" in Iran's domestic politics, too, said one of the officials. "The Iranians are a major source of trouble ... but those kind of moves would only help the hardliners" in Iran and undercut more moderate leaders such as Iranian President Hassan Rouhani.

In addition, said another of the officials, adding the IRGC to the terrorist list would cause friction with U.S. European allies, who in the wake of the 2015 nuclear agreement are trying to rebuild business ties to Iran, which often means contact with the Revolutionary Guard and the companies it controls.

For now, the officials said, the discussion of naming the IRGC a terrorist organization is still in play, but apparently on the back burner. A European security source, speaking on condition of anonymity, said U.S. counterparts told him the order is on hold.

A failure to go forward with the IRGC terrorist designation, which also has gained some support among U.S. lawmakers, could disappoint those looking for a strong response to Iran's recent ballistic missile test.

The new administration warned Tehran at the time that it was being put "on notice" and then imposed a series of new sanctions on Iranian individuals and companies, which a White House official said was just an "initial" step.

(Additional reporting by Mark Hosenball and Phil Stewart; Writing by Matt Spetalnick; Editing by John Walcott and James Dalgleish)

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Trump proposal for terrorist listing of Iran Revolutionary Guard in limbo: sources - Reuters