Thousands of pro-government Iranians are rallying to mark the 31st anniversary of the nation's revolution.
President Mahmoud Ahmadinejad told the rally Iran's enemies were using the nuclear issue and that of human rights to dominate the region.
He also said Iran had produced its first stock of 20% enriched uranium and could enrich up to 80%.
Opposition leaders are trying to mount counter-demonstrations, but are facing a huge security crackdown.
It is the most important day in Iran's political calendar. The government has warned protests will be dealt with.
BBC Tehran correspondent Jon Leyne says it could be the largest confrontation since the disputed election last June, and the government and opposition have chosen to make the day a huge trial of strength.
'Nuclear state'
Official events are being held across Iran, but the main gathering is at Tehran's Azadi Square. State TV showed tens of thousands of people filling the streets.
We are closely watching the sedition movement, and several people preparing to disrupt the rallies were arrested
Esmail Ahmadi Moghaddam
Police chief
Mr Ahmadinejad told the crowds Iran was now a "nuclear state".
"The first package of 20% [enriched uranium] fuel was produced and provided to the scientists," he said.
He added Iran would soon treble output of the fuel.
Earlier this week Iran announced its decision to further enrich uranium for its nuclear programme. It prompted the US to extend sanctions, targeting members of the elite Revolutionary Guard.
Tehran says its nuclear programme is for civilian purposes, but the West suspects it of trying to develop nuclear weapons.
Mr Ahmadinejad also said Western countries were hampering genuine reform in Iran.
"It's been 41 years that they have been opposing the Islamic revolution, and also they have been hampering the progress of this great nation," he said.
'Tear gas and shots'
Meanwhile, reports from the micro-blogging site Twitter and pro-opposition websites said opposition supporters were holding rallies, one of them in the city's Saddeqiya Street.
Amateur footage purportedly showing opposition protests has been appearing on the video-sharing website YouTube, including at least one rally in the Tehran underground.
Opposition leader Mehdi Karroubi had been intending to attend the Saddeqiya street rally, reports say, but his bodyguards were attacked by members of the government's Basij militia as he emerged from his car. His son was arrested as he tried to intervene.
The reformist former President Mohammad Khatami was also reportedly attacked.
His brother Mohammed Reza Khatami and his wife Zahra Eshraghi, the granddaughter of the late Supreme Leader Ayatollah Ruhollah Khomeini, were arrested but later released.
Other opposition sources said security forces had fired shots and tear gas at supporters of Mir-Hossein Moussavi, Mr Ahmadinejad's main rival in last June's elections.
There are also reports of opposition protests in the cities of Tabriz, Shiraz and Isfahan.
Anti-government websites have urged marchers to display green emblems or clothes - the colour adopted by the opposition movement after the disputed election on 12 June last year.
There are reports that internet access has been restricted.
Deadly clashes erupted after the poll, and have taken place sporadically since then.
Ahead of the commemorations, police chief Esmail Ahmadi Moghaddam said the Revolutionary Guards and Basij Islamic militia were ready for any trouble.
"We are fully prepared for holding a safe and glorious rally," he told the semi-official Fars news agency, according to Reuters news agency.