July 7 (Reuters) - A ship was hit in the Strait of Hormuz overnight and Iran said there would be no more peace talks unless Donald Trump halted his repeated threats to restart the war, as millions of Iranians vowed vengeance at funeral processions for their slain leader.
Britain's UKMTO maritime security agency reported a tanker was struck by a projectile that caused a fire 8 nautical miles (14 km) off the coast of Oman, the first reported incident in the Strait of Hormuz since mourning ceremonies
began last week for Supreme Leader Ayatollah Ali Khamenei.
Three sources told Reuters the ship that was hit was a Qatari tanker carrying liquefied natural gas, and that the crew were safe but the engine room was on fire and filled with smoke. News website Axios reported that Iran had fired on two ships. Neither Washington nor Tehran commented directly on the reports.
The incident was a reminder that the fate of Gulf shipping remains unresolved more than four months after the United States and Israel launched a war that they said would halt Iran's ability to threaten its neighbours.
Iran's clerical rulers have exerted newfound control over the world's most important energy shipping route, where they aim to install a permanent system to collect fees in what would amount to a huge shift of the balance of power in a region where Washington has acted as guarantor of security for generations.
Iran's leadership has demonstrated its firm grip on the country during a week of mourning for Khamenei, who was killed along with his daughter, granddaughter, son-in-law and daughter-in-law on the first day of the war.
The caskets of the slain supreme leader and four members of his family were driven through the streets of the seminary city of Qom on Tuesday, where many hundreds of thousands of people carried flags and banners comparing Khamenei to martyrs whose deaths are foundational to the Shi'ite sect.
In chants they vowed to avenge Khamenei. Some bore signs reading "KILL TRUMP".
A similar huge funeral procession was held in the streets of Tehran on Monday, following more solemn prayer events that began last Friday, attracting top figures in Iran's leadership and dignitaries from abroad. Authorities say the leader's body will be taken to Shi'ite holy cities in neighbouring Iraq, then brought back to Iran and laid to rest in a mediaeval shrine.
TRUMP: 'MAKE A DEAL OR WE'RE GOING TO FINISH THE JOB'
The war has been paused under an interim peace deal reached last month, intended to provide a 60-day period for negotiations on a permanent deal. A round of indirect talks in Qatar concluded last week with no sign of headway towards a lasting peace.
Trump has repeatedly threatened to resume bombing, most recently on Monday when he told reporters in the Oval Office: "We're either going to make a deal or we're going to finish the job. OK. And it won't be tough to finish the job. I'd rather make a deal, because I don't want to affect 91 million people."
"We can knock down their bridges in one hour, we can knock out their energy supply."
Iran's Foreign Minister Abbas Araqchi said such threats violated the terms of the memorandum of understanding reached last month to pause the war.
"Millions of proud Iranians rallied in unity to honour Grand Ayatollah Khamenei and his legacy. Neither them nor our Brave Armed Forces are moved by any threats," he wrote below a picture of a huge crowd of mourners.
"Negotiations on final Deal will not commence if threats continue," he wrote. "Honor your signature."
Oil prices, which have returned to around the pre-war level since last month's interim deal let ships resume sailing through the strait, ticked up around 1.5% on Tuesday following the incident in the waterway.
In launching the war four months ago, Trump said his aims were to destroy Iran's nuclear and missile programmes, end its ability to threaten its neighbours and create conditions for Iranians to topple their leaders.
None of those objectives has been met, although Washington says a permanent deal will end what it says is an Iranian programme that could make a nuclear weapon, which Iran says it never sought.
Despite five days of mourning, there has still been no sign in public of his son and successor, Ayatollah Mojtaba Khamenei, believed to have been disfigured by wounds in the same attack and yet to be shown in any image since the war began. Three other sons of the slain leader prayed at the casket on Sunday.
Iran's leaders have portrayed the mass funeral gatherings as proof of national unity following the U.S.-Israeli attacks, although it is difficult to assess how deep that loyalty runs in a country where media and communications are tightly controlled.
Just weeks before the war started, Iran's authorities killed thousands of demonstrators to put down some of the biggest anti-government protests in the country's history, but there has been no sign of organised opposition in Iran since the war began.
(Writing by Peter Graff; Editing by Aidan Lewis)
