US President Donald Trump has threatened Iran after blaming it for an attack on the US embassy in Iraq.
The compound in Baghdad was attacked by demonstrators furious over the deaths of militia members in US air strikes.
Mr Trump tweeted that Iran “will pay a very big price” for any damage or loss of life. “This is not a warning, it is a threat,” he said.
But Iran’s Supreme Leader Ayatollah Ali Khamenei responded by saying the US “can’t do a damn thing”.
Anti-American sentiment was widespread in Iraq, he added.
Tehran has denied that it orchestrated the attack on the Baghdad embassy.
Ayatollah Khamenei’s English-language Twitter account posted a translation of his remarks.
Demonstrators regrouped outside the US embassy on Wednesday. Reports said at least one Iraqi militia had ordered its supporters to leave the area.