You do a nice job of twisting statements inside out. Iran lacks the capability to carry out such a thing, but Israel threatens Iran with the use of nuclear and C/B weapons if Iran were to actually utilize its limited chemical weapons capability in a conflict.
For more on Israeli nuclear doctrine, please see: http://en.wikipedia.org/wiki/Samson_Option
Specifically, on the issue of an Israeli nuclear response, and the status of its own chemical weapons program, please see: Jonathan B. Tucker, "The Future of Chemical Weapons":
Little public information is available about Israel’s CW capabilities. Tel Aviv signed the CWC in January 1993, committing politically to abide by the basic aims of the treaty, but the Israeli parliament decided in 1997 not to ratify until all of Israel’s Arab neighbors agree to follow suit. The top-secret Israel Institute for Biological Research near the town of Ness Ziona is known to conduct research and development on chemical defenses, but some suspect that it does offensive work as well. In addition, there have long been unsubstantiated rumors about an Israeli chemical weapons stockpile in the Negev Desert. Despite the potential harm to Israel’s chemical industry from CWC-mandated restrictions on trade in Schedule 2 chemicals with countries that refuse to join the treaty, security rather than economic concerns have dominated the Israeli debate over ratification. Military analysts such as Gerald M. Steinberg of Bar-Ilan University have argued that the tacit threat of Israeli nuclear retaliation in response to a Syrian or Iranian chemical attack would not be credible because of its lack of proportionality, while relying exclusively on retaliation with conventional weapons would not provide a sufficient deterrent. According to Steinberg, by remaining outside the CWC, Israel creates uncertainty in the minds of potential military adversaries that it may have the capability to retaliate in kind to a chemical attack, thereby bolstering deterrence.
A major stumbling block to chemical disarmament in the Middle East has been the political and strategic linkage that exists between chemical and nuclear arms. Although neither Egypt nor Syria admit possessing chemical weapons, both countries have refused to join the CWC until Israel openly acknowledges its undeclared nuclear arsenal and accedes to the Nuclear Nonproliferation Treaty as a non-nuclear-weapons state. The current deadlock over chemical disarmament in the Middle East is likely to persist unless and until the peace process eases regional tensions and addresses the core security needs on both sides of the Arab-Israeli divide.
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