By Idrees Ali, Humeyra Pamuk and Parisa Hafezi

WASHINGTON/DUBAI (Reuters) - The United States and Iran exchanged fire on Thursday in the most serious test yet of their month-long ceasefire, but Iran said the situation returned to normal while the U.S. said it did not want to escalate.

The renewed hostilities broke out as Washington was awaiting Iran's response to a U.S. proposal that would stop the fighting but leave the most contentious issues, such as Iran's nuclear program, unresolved for now.

Iran's military said the U.S. targeted two ships entering the Strait of Hormuz and carried out strikes on Iranian territory. The U.S. military said it fired in response to Iranian attacks.

Trump told reporters the ceasefire was still in effect and sought to play down the exchange.

"They trifled with us today. We blew them away," Trump said, while inspecting renovations to the Lincoln Memorial's reflecting pool in Washington.

Iran's top joint military command accused the U.S. of violating the ceasefire by targeting an Iranian oil tanker and another ship, and of carrying out air attacks on civilian areas on Qeshm Island in the Strait of Hormuz and the nearby coastal areas of Bandar Khamir and Sirik on the mainland. The military said it responded by attacking U.S. military vessels east of the strait and south of the port of Chabahar.

A spokesperson for Iran's Khatam al-Anbiya Central Headquarters said the Iranian strikes inflicted "significant damage," but U.S. Central Command said none of its assets were hit.

Centcom said Iran had used missiles, drones and small boats in the attack, which targeted three Navy destroyers. The U.S. said it targeted missile and drone sites and other locations in response.

"CENTCOM does not seek escalation but remains positioned and ready to protect American forces," it said in a statement.

Iran also said it would respond if attacked.

"(The) U.S. and its allies must know that Iran will respond forcefully and without the slightest hesitation to any act of aggression or attack," the military spokesperson said, according to state television.

Iran's Press TV later reported that, following several hours of fire, "the situation on Iranian islands and coastal cities by the Strait of Hormuz is back to normal now."

The two sides have occasionally exchanged gunfire since the ceasefire took effect on April 7.

On Monday, the U.S. military said it destroyed six Iranian small boats and intercepted Iranian cruise missiles and drones as Tehran sought to thwart a U.S. naval effort to open shipping through the Strait of Hormuz.

TRUMP URGES NEGOTIATED END TO WAR

Trump suggested ongoing talks with Tehran remained on track despite Thursday's hostilities, telling reporters, "We're negotiating with the Iranians."

Before the latest strikes, the U.S. had floated a proposal that would formally end the conflict but did not address key U.S. demands that Iran suspend its nuclear work and reopen the strait, which before the war handled one-fifth of the world's oil and gas supply.

Tehran said it had not yet reached a conclusion on the emerging plan.

Even so, Trump said Iran had acknowledged his demand that Iran could never get a nuclear weapon, a prohibition he said was spelled out in the U.S. proposal.

"There's zero chance. And they know that, and they've agreed to that. Let's see if they are willing to sign it," Trump said.

Asked when any deal might be reached, Trump said, "It might not happen, but it could happen any day. I believe they want to deal more than I do."

The war has tested Trump's relationship with his U.S. base of supporters, after he had campaigned against involving the United States in foreign wars and promised to bring down fuel prices.

U.S. crude futures rose as much as 3% in early trading in Asia on Friday after the renewed hostilities broke out.

U.S. gasoline prices have climbed more than 40% since late February, rising by about $1.20 a gallon to more than $4, according to data from the American Automobile Association, as disruptions to oil shipments through the Strait of Hormuz pushed crude oil prices higher.

Markets have swung sharply during the course of the war as hopes for a peace deal repeatedly rose and faded.

(Reporting by Reuters bureaus; Writing by Lincoln Feast, Ros Russell, Andrew Heavens, David Brunnstrom and Daniel Trotta; Editing by Andy Sullivan, Kate Mayberry, William Maclean, Gareth Jones, Cynthia Osterman and Edmund Klamann)

Posted by: Alma Angeles/NET25 News