Iran slows atom fuel drive - IAEA

VIENNA (Reuters) - Iran has slowed its nuclear expansion and met some demands for better monitoring but allegations of covert atom bomb research look credible and Tehran must address them, the U.N atomic watchdog said.

The International Atomic Energy Agency report will form the basis for six-power talks on September 2 to look into harsher U.N. sanctions against the Islamic Republic over a uranium enrichment campaign the West fears is a stealthy quest for nuclear weapons.

New Iranian gestures of cooperation with IAEA inspectors could make it harder for the United States and big European allies to persuade Russia and China, major trade partners of Tehran, to agree on steps to squeeze its lifeblood oil sector.

But a Western diplomat said a summary, included in the report, of an IAEA probe blocked by Iran into alleged military dimensions to its nuclear programme was unusually pointed and would be seized on by advocates of tougher sanctions.

Britain said it and other states continued to have "serious concerns" about Iran and Syria's nuclear programmes.

The IAEA report said Iran was enriching uranium with about 300 fewer centrifuges than the almost 5,000 operating at the time of the last IAEA report. It did not say why, but a senior informed diplomat told Reuters earlier a number of machines had been taken down for maintenance or repairs.

But the confidential report, obtained by Reuters, said Iran had raised the number of installed, though not all enriching, machines by some 1,000 to 8,308.

This would allow the Islamic Republic to resume a major expansion of enrichment if it chose, barring technical problems, U.N. officials familiar with the report said.

Officials said they could not rule in or out the possibility that Iran's apparent nuclear slowdown was connected with unrest over alleged fraud in the presidential election that returned Mahmoud Ahmadinejad to power in June.

The West suspects Iran is pursuing the means to produce atomic bombs under cover of a civilian nuclear fuel programme.

Iran says it wants only electricity from nuclear power and has again rejected U.N. demands for a halt despite new fissures in its leadership over the unrest. It has also stymied an IAEA probe into alleged covert nuclear weapons research.

Iran's reported stockpile of low-enriched uranium had increased to 1,508 kg, almost 200 more than in May. Nuclear analysts said the production rate, around 50 percent capacity, appeared the same, albeit with fewer centrifuges on stream.

CAMERA SURVEILLANCE

A relative moderate advocating nuclear dialogue with big powers took charge of the Iranian nuclear energy agency in July.

The accord on better camera surveillance and data collection at Natanz came after the IAEA complained that Iran's vast expansion of centrifuge operations since 2008, without corresponding monitoring upgrades to keep pace, left them unable to verify nothing was being diverted for military purposes.

Mark Fitzpatrick, senior non-proliferation fellow at London's International Institute for Strategic Studies, said the report showed Tehran was continuing to stonewall questions about suspicious past activities despite "last-minute" cooperation.

"The number of newly installed centrifuges is also disturbing. Iran has been eager to install as many as possible, so that if it goes into negotiations that require a freeze on the number, it will start off from a much higher position."

The report attached an unusually pointed summary of the IAEA's blocked efforts to check Western intelligence reports suggesting that Iran illicitly combined uranium processing, high-explosive tests and work to remodel a missile cone with the possible purpose of devising a workable nuclear weapon.

While the summary contained no new, hard evidence of nuclear weapons work and said the intelligence remained unverified, it added the material was compelling and must be addressed by Iran.

"The information ... appears to have been derived from multiple sources over different periods of time, appears to be generally consistent, and is sufficiently comprehensive and detailed that it needs to be addressed by Iran with a view to removing the doubts which naturally arise, in light of all of the outstanding issues, about the exclusively peaceful nature of Iran's nuclear programme," the report said.

Iran had acknowledged some of the activities outlined in the intelligence material and insisted it had no nuclear application, but withheld documentation and refused access to sites and individuals to back up its assertions, it said.

The report said Iran also allowed inspectors to revisit the Arak heavy-water reactor site this month after barring access for a year. But U.N. officials cautioned this was a one-off and Tehran had not resumed providing design information to the IAEA.

Iran told the IAEA the complex was 63 percent complete and the reactor vessel would be installed in 2011.

Western concerns the Arak site could be put to use making weapons-grade plutonium grew after its roof was installed, foiling monitoring with satellite imagery. Iran says it will only produce isotopes for medicine and agriculture.

Iran on Monday again ruled out a suspension to enrichment activity or even a freeze, or cap, at current production levels which major powers have offered as possible way into talks.

Western diplomats said Iran was making a show of compliance with the IAEA only to keep Russia and China opposed to truly biting sanctions, while still dodging the full transparency vital to defusing mistrust of its nuclear intentions.

Crucially, Iran has failed to adopt an IAEA protocol that permits snap inspections ranging beyond officially declared nuclear sites. Without that, the IAEA cannot certify Iran is not hiding any activity oriented to yielding atomic bombs.

(Editing by Andrew Roche)