Former presidents Rafsanjani and Khatami have now publicly questioned the legitimacy of President Ahmadinejad's reelection. In doing so, they have questioned the legitimacy of Supreme Ruler Khamenei's authority (see NYT, Economist). This is a dramatic development and almost guarantees a deep political crisis inside Iran.
The timing and manner of Rafsanjani and Khatami's falling-out is especially notable. Khamenei and the Islamic Revolutionary Guard Corps (IRGC) had suppressed street protests, thus removing the pressure of a visible short-term crisis in the country. But in spite of that breathing space and after having several weeks to consider their options, Rafsanjani and Khatami still made the fateful decision to publicly oppose the Supreme Ruler and the power of the IRGC. Being experienced insiders, they would only opt for this course if they have high confidence in their odds. And they must also know that other dictum about palace revolts: "If you strike at the king, you must strike to kill." A compromise political settlement with Khamenei and Ahmadinejad would not likely be a stable outcome.
Will there now be a split within the IRGC? Or will the regular army enter the fight perhaps on the side of the rebels? It is hard to believe that Rafsanjani and Khatami would have committed themselves without the assurance of support from somewhere in the security services.
What do these developments mean for Western interests? There is now no chance (at least over the foreseeable future) of a negotiated settlement with Iran over its nuclear program. It would be pointless for the U.S. to have a negotiation with a regime that lacks legitimacy inside its own country and may be swept away at any moment. Nor should anyone expect that regime to make any concessions on the crown jewel of its (remaining) authority.
Thus the West is left hoping that a new revolution in Iran, if that is what happens, will somehow unravel Iran's nuclear and ballistic missile programs. The hope is that Iran's future reform government would opt for positive engagement with the West in order to boost Iran's economy and standard of living. Under this scenario, the new Iranian government would be —to scrap the nuclear and missile programs in order to open up that path or just to conserve money for other investments. Such a scenario is possible but also seems like a long-shot. Recall that Iran's then still-clandestine nuclear program made rapid advances during the supposedly moderate Khatami administration.
The West can tighten financial sanctions on the IRGC, hoping that internal squabbling over money weakens its power. Saudi Arabia can help by using its excess capacity to cap oil prices. The West can use diplomacy to preclude outside investment in Iran's energy sector. Beyond that, there seems little else the West and the Obama administration can do except watch.