By Parisa Hafezi and Pesha Magid
DUBAI/JERUSALEM, March 4 (Reuters) - The powerful son of Iran's slain supreme leader emerged on Wednesday as a frontrunner to succeed him as the U.S. stepped up its military campaign against Tehran and NATO air defences destroyed a missile heading from Iran into Turkish airspace.
The missile incident reported by Turkey was the first time a NATO member has been drawn into the Middle East conflict, but U.S. Defense Secretary Pete Hegseth said there was no sense that it would trigger NATO's collective defence clause.
In a sign of the U.S. military's reach, Hegseth said a U.S. submarine had sunk an Iranian warship off the southern coast of Sri Lanka. At least 80 people were killed, Sri Lanka's deputy foreign minister told local television.
'NOT A FAIR FIGHT'
The United States and Israel pressed on with their round-the-clock assaults on Iran that began on Saturday. The top U.S. commander said the campaign was "ahead of the game plan" and Hegseth said the U.S. was winning the conflict.
"This was never meant to be a fair fight, and it is not a fair fight. We are punching them while they're down," Hegseth told a briefing. "Our air defenses and that of our allies have plenty of runway. We can sustain this fight easily for as long as we need to."
A fall in global markets turned into a rout in Asia, including a record-breaking crash in Seoul, as some investors were unconvinced by U.S. President Donald Trump's assurances he would quickly reopen the world's most important shipping corridor and release blockaded Middle East oil and gas.
European markets later stabilised and turned higher after two days of sharp losses, on hopes that the war might end soon. Some traders said the improved sentiment followed a New York Times report that Iranian intelligence had reached out to the CIA early in the war about a path towards ending it.
The report said officials in Washington were sceptical of an "off-ramp" for now, while Trump said on Tuesday that Iranians wanted talks but it was "too late".
MOJTABA KHAMENEI NOT IN TEHRAN WHEN FATHER KILLED
As new explosions rang out in Tehran, plans were in doubtfor a funeral for the elder Khamenei, 86, killed by Israeliforces on Saturday in the first assassination of a nation's topruler by an airstrike.
The body had been expected to lie in state in a vast Tehran mosque from Wednesday evening, but state media reported a farewell ceremony had been postponed.
Two Iranian sources, speaking on condition of anonymity, told Reuters that Mojtaba Khamenei, son of Iran's slain supreme leader, was not in Tehran when his father was killed in a strike that destroyed the leader's compound.
Iran said the Assembly of Experts that will select the new leader would announce its decision soon, only the second time it will have done so since the Islamic Republic's founding in 1979.
Assembly member Ayatollah Ahmad Khatami told state TV the candidates had already been identified but did not name them.
Israel said it would hunt down whoever was chosen.
Other candidates for supreme leader include Hassan Khomeini, grandson of the Islamic Republic's founder and a champion of the reformist faction sidelined in recent decades.
But the favourite appears to be Mojtaba Khamenei, who has amassed power as a senior figure in the security forces and the vast business empire they control, the Iranian sources said. Choosing him would send a signal that hardliners were still firmly in charge.
Some Iranians have openly celebrated the death of the supreme leader, whose security forces killed thousands of anti-government demonstrators only weeks ago in the biggest domestic unrest since the era of the revolution.
But Iranians angry with the government said there was unlikely to be much sign of protest while bombs are falling.
"We have nowhere to go to protect ourselves from strikes, how can we protest?" Farah, 45, said by phone from Tehran, adding that the security forces "are everywhere. They will kill us. I hate this regime, but first I have to think about the safety of my two children."
U.S. SUBMARINE SINKS IRANIAN SHIP
The U.S. says it has effectively sunk the entire Iranian navy. Hegseth confirmed that a U.S. submarine had sunk an Iranian warship off the southern coast of Sri Lanka, where a vessel of the same name had been listed as taking part in a naval drill held in the Bay of Bengal from February 18 to 25.
Israel said its forces hit targets across Iran for a fifth day. An Israeli F-35 fighter jet shot down an Iranian Yak-130 over Tehran, believed to be the first time the new-generation F-35 has downed a manned aircraft in combat.
The campaign has also expanded to Lebanon, where Israel has bombed Beirut and vowed to uproot the Iran-backed group Hezbollah after it launched strikes into Israel.
The Israeli military said on Wednesday its ground forces were advancing in southern Lebanon and ordered residents to evacuate the entire swathe of territory south of the Litani River.
Turkey's defence ministry said the Iranian missile that was shot down by NATO air and missile defence systems stationed in the eastern Mediterranean had passed over Iraq and Syria. It was not clear where it had been headed.
Under NATO's founding treaty, members are bound by a collective-defence clause, Article 5, which treats an attack on one member as an attack on all.
Hegseth said there was "no sense that it would trigger anything like Article 5."
(Reporting by Reuters bureaus, Writing by Peter Graff and Timothy Heritage, Editing by Aidan Lewis)
