China envoy urges Iran to compromise, wary on sanctions

GENEVA (Reuters) - China has urged Iran to accept a nuclear fuel swap proposal to ease demands for new sanctions on Tehran, a senior Chinese diplomat said, adding that Beijing wants "every avenue" tried before considering sanctions.

China faces mounting demands from Western powers to approve a proposed United Nations resolution imposing new sanctions on Tehran, which they say wants the means to make nuclear weapons and has broken non-proliferation safeguards.

Beijing has held off giving a firm response to those demands, with its Foreign Minister Yang Jiechi saying that it does not view sanctions as the "fundamental solution" to the dispute with Iran, a big supplier of oil to China.

He Yafei, China's new ambassador to the United Nations in Geneva, told reporters that his government was also pressing Tehran to compromise.

"We have been talking to Iran constantly, bilaterally I mean," He told reporters at a briefing to mark his arrival in Geneva. "We are urging them to agree to the proposal by the IAEA to have this exchange of nuclear fuel of the Tehran research reactor as a first step," said He.

The International Atomic Energy Agency -- the U.N. agency overseeing international nuclear safeguards -- has proposed swapping Iran's low-enriched uranium for higher-grade nuclear fuel for a Tehran reactor producing medical isotopes.

The plan would be a step towards strengthening international oversight of Iran's nuclear activities, which Western powers say are directed at giving Tehran the means to make nuclear weapons.

Iran says its uranium enrichment activities are to make fuel for planned nuclear power plants.

Ambassador He was formerly a vice foreign minister, heavily involved in negotiations over Iran, and his remarks were the most candid public accounting of China's stance on the nuclear standoff for some time.

He indicated that China would not welcome new U.N. sanctions on Iran, but may consider them if it found the other powers had tried all the options for a diplomatic solution.

China is one of the five permanent members of the U.N. Security Council, each holding the power to veto resolutions.

"I can tell you honestly we don't like sanctions," he said. "I think the door of compromise through negotiation, the door of diplomacy, is not closed," he added.

"We need to exhaust every avenue before we decide on whether we should have new additional sanction measures."

A draft Western proposal for a fresh U.N. Security Council resolution calls for restricting more Iranian banks abroad, but does not press for sanctions against Iran's oil and gas industries.

China has backed past resolutions on Iran, after working to cut measures that could threaten flows of oil and Chinese investments.

In 2009, Iran was China's third biggest source of imported crude oil, behind Angola and the top supplier Saudi Arabia.

But Beijing must also weigh the views of Arab states, especially Saudi Arabia, which have shown growing impatience with Tehran. And He said that his government would not accept Iran gaining the capability to make nuclear weapons.

"Iran as an NPT member certainly is entitled to the peaceful use of nuclear energy. But Iran should not develop any capability that can produce nuclear weapons. That would be very destabilising," said He.

The Nuclear Non-Proliferation Treaty, or NPT, is the key agreement seeking to restrict the spread of nuclear weapons.

(Writing by Chris Buckley in Beijing; Editing by Dominic Evans)