But while the release of Israeli soldier Gilad Shalit from Hamas-ruled Gaza in return for 477 Palestinians detainees was celebrated on both sides, it did not address any core disputes that have bedevilled peace talks for 20 years, analysts said.

There was no sign from Israel or Hamas, an Islamist group sworn to its destruction, or the Palestinian Authority of President Mahmoud Abbas, who favours negotiated peace, that the Egyptian-brokered deal could be a starting point for dialogue.

Still, world leaders nevertheless saw room for hope in an improvement of the regional atmosphere laying groundwork for a revival of peace talks shelved last year over Israel’s continued expansion of settlements in the occupied West Bank.

“I would like to believe that this will permit the taking up again of discussions” between the Israelis and Palestinians, said French President Nicolas Sarkozy. “When everyone is speaking to each other, it facilitates things.”

“For France, it’s a very big relief, it’s a great joy and it proves that even in the most difficult moments, there can be hope,” Sarkozy said in southern France. Shalit holds dual French nationality and Paris has closely followed his plight.

British Foreign Secretary William Hague urged Israel to build on the momentum provided by the release of Shalit to advance peace talks with the Palestinians.

“It provides a glimmer of hope in an often bleak scene that a successful negotiation can be carried out on this difficult subject,” Hague told Reuters during a trip to North Africa.

“In particular, we believe Israel should be ready to make a more decisive offer than Israeli leaders have made in recent years on the peace process to give talks a chance of success.

“I also hope,” Hague added, that “it will encourage Israel to relax the controls on the crossing points into Gaza. The extent of the controls has generally served to strengthen Hamas rather than to weaken them.”

REVIVAL OF PEACE PROCESS CREDIBILITY?

Israel struck the prisoner swap deal with Islamist group Hamas, which rules Gaza. Hamas does not recognise Israel and has refused to renounce violence, putting it at odds with Abbas who rules in the West Bank.

Analysts said the accord weakened Abbas, who has little to show for years of on-off talks with Israel, but world leaders looked to the agreement to have a broader, positive impact.

Middle East peace envoy and former British prime minister Tony Blair told the BBC he hoped the prisoner swap “offers us a moment of opportunity, and not simply in respect of Gaza where Hamas are presently in charge, but also for a … revival of credibility in a peace process we really need to prioritise.

“What has happened offers a chance of a change of atmosphere, a change of context, but we’ve got to use that to push on and try to revive a credible negotiation for the two-state solution.”

A spokesman for German Chancellor Angela Merkel said she counted on successful cooperation between Israel and Egypt leading to the prisoner exchange to defuse recent new tensions between the two, who signed a peace treaty in 1979.

“This would be an important contribution to the Middle East peace process,” the Merkel spokesman said, alluding to Cairo’s role as a mediator in Israeli-Palestinian disputes, particularly to do with security issues around Gaza.

German President Christian Wulff wrote to Israeli counterpart Shimon Peres and to Shalit’s parents saying the prisoner exchange was “a sign of a peaceful future for Israel and the region.”

U.N. Secretary-General Ban Ki-moon told reporters in Switzerland: “With this release, it will have a far-reaching positive impact to the stalled Middle East peace process.”

But most analysts were doubtful, seeing the prisoner swap as a one-off that did nothing to tackle yawning political, ideological and religious divisions between Israel and the Palestinians and even within their own camps.

Abbas wants a Palestinian state in the West Bank and Gaza with East Jerusalem as its capital, alongside Israel. But his adversary Hamas does not accept the validity of peace talks.

Israel sees Jerusalem as its eternal, indivisible capital and major West Bank settlement blocs as a future part of the Jewish state. It wants continued control over a Palestinian state’s external borders.

Most Israelis in opinion polls favour a two-state solution, but their governing coalitions depend on rightist parties who back settlement expansion on land seen by Palestinians as crucial to their hope for a viable state.

Abbas is now pushing for recognition of statehood at the United Nations, a unilateral move opposed by Israel and its main ally, the United States. He is unlikely to retreat, especially with Hamas seemingly bolstered by the swap accord.

“I tend to be rather sceptical that this could signify any real turning point in negotiations considering the multiplicity of obstacles which deter a peace settlement,” said Anthony Skinner, Middle East director at Maplecroft think tank.

“Not least the status of Jerusalem, land swaps in the context of a pre-1967 border agreement, continuous expansion of Israeli settlements, upholding the right to return for Palestinians in the region, the threat of continuous attacks by militants and the PA’s will to gain international recognition.”

(Additional reporting by Yann Le Guernigou and John Irish in Paris, Alexandra Hudson in Berlin, Peter Apps and Stephen Addison in London, Adrian Croft in North Africa, Catherine Hornby in Rome, Stephanie Nebehay in Geneva, Crispian Balmer in Jerusalem; Editing by Philippa Fletcher)

Some commentators said on Monday a swelling popular backlash
in Greece against yet harsher frugality was driving the country
towards the disastrous default a rescue is supposed to prevent.

Austrian mass-circulation tabloid Oesterreich, expressing
rising taxpayer resentment around the EU, called for an EU-wide
plebiscite “to let those who have to pay for Greece decide”
whether to rescue it again or preserve “a euro without Greece”.

Euro zone finance ministers on Sunday postponed a final
decision on extending 12 billion euros ($17 billion) in
emergency loans to Greece, saying the Greek parliament first had
to enact laws on fiscal reforms and selling off state assets.
[ID:nLDE75I0FM] [ID:nDE75J0AY]

A vote is expected by the end of June but Greece’s political
elite is under widening, intensifying popular pressure to dilute
if not postpone the next round of financial shock therapy sought
by markets to curb systemic Greek profligacy and corruption.

“It is a win that all 17 (Euro zone) states have said for
the first time the private sector must be involved and that (the
contribution) should be substantial,” Dutch finance minister Jan
Kees de Jager told Dutch radio.

“But there’s still a long way to go,” de Jager said. “Will
Greece be able to get all the painful measures passed through
the parliament in coming days? Without that, we will not be
involved. It is important that pressure is kept on Greece.”

But some analysts said escalating the aid may ultimately be
for nought since Greece’s leaders had lost public respect and
its economy was unlikely to grow and regain competitiveness
without exiting the monetary straitjacket imposed by the euro.

“(The Greek protest) movement is different from previous
forms of collective action. It shows a deep crisis of legitimacy
not just for the party in power but of a political system and
state as such,” the French centre-left daily Liberation said in
an editorial written by Greek analyst Stathis Kouvelakis.

ANGRY GREEKS SEE “AUSTERITY CLAMP”

Ta Nea, a centre-left, pro-government Greek daily, welcomed
what it said were signs from recent Greek negotiations with EU
creditors that it would be able to spare the financially
neediest Greeks from the next “austerity clamp”.

“Our lenders and partners do not wish to see the Greek
economy collapsing. In this context the government can argue
that to achieve targets Greek society must not be exhausted.”

But centre-left newspaper Ethnos said Prime Minister George
Papandreou’s Socialist government was caught “in an iron social
and political vise” by popular resistance to more sacrifice.

“The stance of society (veers between) negative to massively
angry. All parties are refusing to work with the government and
are asking for elections,” Ethnos warned.

The Eleftherotypia daily vented the view of many ordinary
Greeks, blaming the EU and other outsiders for their crisis.

“Led by Germany the EU, instead of showing solidarity and
trying to solve the problem as a family matter in the Union,
confronted Greece. It imposed punishing rules… instead of
providing help,” Eleftherotypia said. “Today Greece is at risk
of becoming Europe’s little whore.”
Underlining the peril to some EU coalition governments
inherent in showering more money on Greece, the leader of the
Dutch rightist Freedom Party that props up the minority
government said it opposed more largesse for Greeks.

“Greece should leave the euro zone and reintroduce the
drachma (pre-euro currency). No more Dutch tax money to the
corrupt and de facto bankrupt Greek,” Geert Wilders said.

He said that if the Dutch government joined a new bailout
for Greece, then it “will have a major and very serious
political problem with my party”.

In Germany, Europe’s most widely read and influential
newspaper, Bild said financially squeezed taxpayers were
bristling at conservative Chancellor Angela Merkel’s readiness
to cough up more relief for Greece rather than her own people.

“Will the Greek crisis ruin all hopes for tax cuts in
Germany? In Germany more and more citizens are asking themselves
– there is money for the Greeks but when will there be some for
me, the simple taxpayer?” Bild said.

The conservative daily Frankfurter Allgemeine said Merkel
was working feverishly to come up with a permanent EU financial
stability regime “but is giving out the impression of a fire
marshal in perpetual stress: several fires, few pails, no plan”.

“The German government calls this ‘crisis politics’ …
But the citizen does not understand where this is going… this
yo-yo-ing is difficult to explain to the voter,” the German
financial daily Handelsblatt said in an editorial.

“Political pressure on Merkel from the conservatives and her
coalition is rising immensely,” it said.

The liberal Munich daily Sueddeutsche Zeitung said Germans
are “warily asking whether it can be right to tie up one package
after another for a country being governed by corrupt elites.

“Should Greece not leave the EU, or reapply? … For a long
time the Greek crisis has not been (so much) about money but
about the biggest asset the EU has — its credibility. Its
disastrous crisis management is making citizens, allies and
financial markets nervous,” the Sueddeutsche said.

Austria’s Oesterreich said zigzagging over Greek aid pointed
to a lack of a strategy allowing “shameless financial markets
(to) blackmail apparently helpless politicians”, and it called
for an EU-wide referendum.

“EU citizens should decide if they want to give Greece 120
billion euros to rescue the euro. Or if they want a euro without
Greece. Inform voters finally and let those that have to pay for
Greece decide,” Oesterreich said.

(Additional reporting by Paris, Berlin, Amsterdam, Athens
and Vienna bureaux; editing by Janet McBride)

Other factors supporting this argument include an Islamic ruling elite in Iran whose anti-Western ethos precludes negotiated rapprochement and a U.N. inspection regime too weak to catch any covert attempt to develop atomic bombs in a timely fashion.

U.S. Secretary of State Hillary Clinton’s airing last year of how Washington might handle a nuclear-capable Iran, by arming Gulf allies and creating a regional defense shield, stunned and angered Israel, which considers Tehran an existential menace.

Obama administration officials hastened to stress then and continue to say now that the world cannot allow a nuclear Iran and harsher sanctions will help forestall any such scenario.

But even Israel’s defense minister has suggested an Iran with nuclear “breakout” ability would not doom the world, and policymakers should have a strong fallback plan — even if they don’t say it publicly — if sanctions fail to restrain Iran.

“I don’t think the Iranians, even if they got the bomb, are going to drop it immediately on some neighbor. They fully understand what might follow. They are radicals, but not total ‘meshugenah’,” Ehud Barak said in a speech last month.

He was using the Yiddish word for “nut cases,” and alluding to the certain threat to Iran of annihilation by foes with massively greater nuclear firepower — Israel and the United States — if it started a nuclear conflict.

“We should … think thoroughly and in a consequential manner about what should happen if, against our hopes, wishes and dreams, it (sanctions or talks) won’t work,” he told a February 26 meeting of the Washington Institute for Near East Policy.

As doubts about the feasibility of effective sanctions or pre-emptive war have grown, debate has arisen about whether a nuclear-ready Iran could be “contained,” somewhat as the United States did the Soviet Union and China during the Cold War era.

Containment could make sense, Foreign Policy magazine said in an essay entitled, “After Iran Gets the Bomb,” because the Islamic Republic’s overriding priority was regime protection.

Iran recognized its limitations, operating “among wary neighbors” whom it did not seek to invade. Rather, the point of the nuclear program was to establish Iran as the “dominant power in the region while preserving political control at home,” wrote James Lindsay and Ray Takeyh, strategic analysts at the Council on Foreign Relations in New York.

THREE “NO’S” OF CONTAINMENT

A containment, or deterrence, strategy, they said, could spell out to Iran that it could not start a conventional war, use or transfer atomic know-how, materials or weapons to others, or boost support for militant attacks abroad without triggering U.S. retaliation by any means, including nuclear weapons.

Containment advocates cite Iran’s history of strategic caution, even under Islamic revolutionary rule since 1979.

Iran has avoided direct military conflict with rival states, instead backing proxy militants that have bloodied U.S. and Israeli predominance in the Middle East but not jeopardized it.

Dennis Blair, head of the U.S. intelligence apparatus, has estimated that Iran will be unable to derive a nuclear warhead from highly enriched uranium before 2013 because of technical bottlenecks it has yet to overcome.

But last month, the U.N. nuclear watchdog said it suspected Iran was secretly working to design a nuclear-tipped missile.

Iran meanwhile has conducted highly public ballistic missile tests it says will deter “aggression” by U.S. and Israeli foes.

Tehran has also snubbed President Barack Obama’s entreaties to negotiate deals he says would guarantee Tehran’s right to purely peaceful nuclear energy under effective International Atomic Energy Agency (IAEA) inspections.

Given Iran’s recalcitrance, the United States has been building up early-warning systems and ballistic missile defenses in the Gulf — prompting some U.S. legislators and analysts to suggest a nascent containment strategy is already in place.

Since Iran sees its nuclear program as synonymous with sovereignty, “the most realistic, ‘best case’ scenario is a long cold war (between Iran and the West),” said Mark Fitzpatrick at London’s International Institute for Strategic Studies.

“Although its missile and nuclear programs can’t be stopped, they will be constrained by international sanctions, export controls and industrial sabotage,” he told Reuters.

Iran shrugged off three batches of limited U.N. sanctions imposed over its refusal to suspend enrichment for talks or open up to IAEA scrutiny. Now it faces a U.S.-drafted fourth round targeting banking, shipping insurance and arms trade.

But that package is likely to be stripped down to prevent a U.N. Security Council veto by Russia and China.

A U.S. drive for “crippling sanctions” against Iran’s huge oil and gas sector foundered on broad international misgivings.

U.S. officials determined such a move would harm ordinary Iranians and sap popular ferment against hardline Islamic rule.

As for war, experts ranging up to the U.S. defense chief say this would only delay, not stop a nuclear-armed Iran since its sites are widely dispersed, fortified and hidden underground.

Beyond that is the fear of Iran unleashing militants on U.S.-led forces exposed in chronic conflicts in Afghanistan and Iraq, or disrupting Gulf oil exports, causing prices to soar when recession-hit Western economies could ill-afford it.

“We lost the battle to stop Iran enriching uranium because we were stupid in insisting on zero enrichment. We’ll need to learn to live with (a potential Iranian nuclear breakout),” Gary Sick, a former U.S. national security adviser, told Reuters.

(Editing by Noah Barkin)

A diplomat in the closed-door, 35-nation International Atomic Energy Agency meeting said China’s ambassador reiterated that more negotiations, not sanctions against its major trade partner, must be pursued.

IAEA director Yukiya Amano, in a February 18 report to the U.N. watchdog’s governors, said for the first time that intelligence showed Iran may be trying to design a nuclear-armed missile now, instead of only in the past — as Washington assessed in 2007.

U.S. and EU envoys told the meeting they shared his concern.

Amano also said Iran began higher-grade uranium enrichment on February 9 before his inspectors could get to the scene and beef up monitoring. Diplomats said Iran was refusing to allow more cameras and inspections at very short notice.

Iran’s IAEA envoy Ali Asghar Soltanieh said Amano’s report had “misled the public” and was “not balanced and factual.” He said Tehran alerted inspectors by letter two days before the enrichment boost, in keeping with safeguards obligations.

Soltanieh implied that Iran could quit the Non-Proliferation Treaty (NPT) if it could no longer expect to be treated justly.

But to reporters later, Soltanieh reverted to Tehran’s standard line: “I officially declare we will not withdraw from the NPT and we will not have nuclear weapons as an option.”

An NPT pullout by Iran would mean the ejection of IAEA inspectors and could provoke Israeli or U.S. attack.

IAEA CHIEF PUSHES BACK AT IRAN

In a riposte to Soltanieh, Amano defended his impartiality by saying the intelligence derived from a variety of sources over a long period and been judged compelling by a team of nuclear experts, diplomats there said.

Amano said Iran “is a special case” because it had hidden earlier nuclear activity from IAEA scrutiny and was stonewalling inspectors seeking explanations of intelligence pointing to Iranian efforts to “weaponize” enrichment technology.

Top officials in Tehran have portrayed the Japanese IAEA chief, who succeeded Mohamed ElBaradei in December, as an inexperienced lackey of the pro-sanctions Western powers.

Spain’s envoy to the IAEA, speaking as the EU’s current president, noted Amano’s complaint that Iran started refining uranium up to 20 percent last month without inspectors present.

This violated Article 45 of Iran’s safeguards agreement with the IAEA, “which calls for notice of major changes ‘sufficiently in advance’,” the unusually hard-hitting EU statement said. Washington’s IAEA ambassador agreed in remarks to reporters.

The United States said Iran’s “cat-and-mouse game” with inspectors, its plan for 10 more enrichment sites and snubbing of an IAEA-brokered deal to swap enriched uranium for fuel for a medical isotope reactor would pave the way to stiffer sanctions.

“We hope that Iran will change its current course and seek the path of negotiations. Not doing so leaves the international community no choice but to pursue further, deeper sanctions to hold Iran accountable,” said U.S. Ambassador Glyn Davies.

Western delegates challenged Iran’s assertion that enriching uranium to 20 percent purity was solely to make fuel for the reactor itself, rather than launching itself most of the way down the road to making bomb-grade nuclear fuel.

They said Iran lacked the fuel conversion technology and therefore could not hope to replenish the reactor’s imported Argentine fuel stock before it runs out later this year.

Amano has unfurled a blunter IAEA line on Iran, something likely to bolster sanctions proponents, after what Western diplomats said was the reluctance of ElBaradei to confront Tehran due to doubts about the veracity of some intelligence.

At Wednesday’s meeting, Iran and the Non-Aligned Movement of developing nations also objected to Amano’s omission — unlike in ElBaradei’s reports — of references to Tehran’s denials of wrongdoing and the fact the intelligence has not been verified.

(Additional reporting by Sylvia Westall; Editing by Dominic Evans)

Medvedev said he still hoped to avoid new punitive measures, but added Russia could not wait forever for cooperation by Tehran, suspected by the West of developing nuclear weapons.

“We are optimists and we are not losing the feeling that we may achieve success,” Medvedev said. “Nonetheless, if it doesn’t work out … Russia is ready to consider with our other partners the question of introducing sanctions.

Sarkozy told reporters: “(Medvedev) told me of his receptiveness to the question of sanctions so long as they don’t create humanitarian dramas.”

Israel, which sees itself directly threatened by any Iranian nuclear breakthrough, voiced optimism that China would not veto any new U.N. Security Council sanctions, saying Beijing had listened attentively to a visiting Israeli delegation.

Russia, and even more so China, have been reluctant in the past to endorse any broader sanctions against Iran, which denies seeking nuclear weapons.

A draft fourth Security Council resolution is expected as soon as this week. Some Western diplomats have predicted it would contain a “symbolic” tightening of sanctions against Iranian government assets like the Revolutionary Guard Corps.

That would fall far short of the sanctions Israel wants imposed on Iran’s lifeblood oil exports and refined petroleum imports. Those hopes were dented when Washington said last week it opposed sanctions that could hurt the Iranian populace.

The new U.N. nuclear agency chief defended a report which said Iran could be trying to develop a nuclear missile.

“In my view, this report is factual and absolutely impartial. That is the essence … it took stock of the whole picture,” Yukiya Amano said told reporters. “I wanted the report to be clear, straightforward, easy to read and understand.”

He said intelligence information that hardened the IAEA’s disquiet about possible nuclear weapons-relevant activity in Iran was collected from multiple sources and was consistent in detail, timeline, and Iranian officials and agencies cited.

“We have an integrated team of experts, we have experience. And the information is extensive. We cross-check it. After this process, we are saying that altogether it raises concern.”

Iran increased disquiet in the IAEA about its behavior last month by, according to Amano’s report, starting enriching uranium to a higher, 20 percent purity before inspectors could get to the scene and enhance surveillance methods.

“NO PROOF”

Iran’s move heightened suspicions that its goal is a stockpile of bomb-grade uranium enriched to 90 percent.

Iran insists its enrichment work is geared solely toward medical research and generating electricity, though it lacks a working nuclear power station.

Iranian Foreign Minister Manouchehr Mottaki insisted the Islamic Republic had fully cooperated with the IAEA.

“There is no proof or reason to see diversion of Iran’s peaceful nuclear activities. There is no document,” he told a news conference in Geneva.

Last month Iran announced a start to higher-scale enrichment that would refine uranium to 20 percent purity — the level needed for conversion into fuel plates for its Tehran research reactor, which makes isotopes for cancer patients.

Iran moved 94 percent of its reserve of low-enriched uranium (LEU) above ground from its Natanz subterranean enrichment plant to draw what it needed to refine it up to 20 percent purity, then moved it back underground, Tehran’s IAEA envoy said.

He dismissed media speculation that Iran had placed a large amount of the material in a visible spot above ground to provoke an Israeli air strike that would give Iran a pretext to expel U.N. inspectors and develop atom bombs for security reasons.

Iran made its first official response last week to an IAEA-brokered proposal that it swap its LEU for foreign-made uranium enriched to 20 percent and help allay Western fears.

Talks on the deal were still under way, Mottaki said.#

“The issue of swap, it is possible to be carried out. The agreement could be made now, but the realization, the fulfillment of the swap needs time,” he said.

Iran says it will only accept a simultaneous swap on its soil. But that would be unacceptable to the United States and its European allies.

“The half-life of that offer is fading very, very rapidly … Our energies now have to move in other directions and you know what they are,” Glyn Davies, United States envoy to the IAEA, told reporters.

(Additional reporting by Sylvia Westall in Vienna, Dan Williams in Jerusalem and Stephanie Nebehay in Geneva; Writing by Jon Hemming; Editing by Ralph Boulton)

Yukiya Amano spelled out a “clear” approach to Iran’s nuclear activity after what diplomats said was the reluctance of his predecessor Mohamed ElBaradei to confront Iran due to his skepticism about the veracity of Western intelligence on Tehran.

Amano’s blunter line on Iran could be significant if it increases momentum toward harsher United Nations sanctions on Iran. Six world powers have begun deliberations on more sanctions at U.N. Security Council level in New York. In an address to the U.N. agency’s board of governors and a news conference, Amano did not repeat a politically sensitive reference in a February 18 report on Iran about “the possible existence in Iran of past or current undisclosed activities related to the development of a nuclear payload for a missile.”

Diplomats said Amano’s reticence on Monday may have been a gesture to dampen tensions within the IAEA’s governing body after a developing nation bloc, to which Iran belongs, suggested his report was not sufficiently balanced.

“In my view, this report is factual and absolutely impartial. That is the essence … it took stock of the whole picture. I wanted the report to be clear, straightforward, easy to read and understand,” Amano told reporters.

He said intelligence information that hardened the IAEA’s disquiet about possible nuclear weapons-relevant activity in Iran was collected from multiple sources and was consistent in detail, timeline, and Iranian officials and agencies cited.

“We have an integrated team of experts, we have experience. And the information is extensive. We cross-check it. After this process, we are saying that altogether it raises concern.”

“CHOSE OUR WORDS CAREFULLY”

Asked to address Iranian accusations of bias, he said: “My report does not say that Iran (indisputably) has or had a nuclear weapons program. I want to make that clear. We have chosen our words carefully,” Amano said.

He said it was urgent for Iran to dispel suspicions by suspending nuclear fuel production, allowing unfettered U.N. inspections and opening up to IAEA investigators.

Iranian officials have portrayed Amano as lacking experience, competence and independence from Western powers, something IAEA officials and Western diplomats strongly deny.

Iran denies ever seeking nuclear bomb capability, saying its uranium enrichment drive is only for peaceful energy purposes.

Iran increased disquiet in the IAEA about its behavior last month by, according to Amano’s report, starting enriching uranium to higher, 20 percent purity before inspectors could get to the scene and enhance surveillance methods.

Iran’s move heightened suspicions that its end game is a stockpile of bomb-grade uranium enriched to 90 percent.

A senior diplomat close to the IAEA said safeguards against illicit escalation of enrichment beyond civilian uses remained weak and the agency was pressing Iran to allow snap inspections, “within minutes of notice,” at the 20 percent production site.

(Additional reporting by Sylvia Westall; Editing by Myra MacDonald)

He dismissed media speculation that Iran had placed a large amount of the material in a visible spot above ground to provoke an Israeli air strike that would give Iran a pretext to expel U.N. inspectors and develop atom bombs for security reasons.

Iran has said its move to feed low-enriched uranium (LEU) into centrifuges for higher-scale refinement is to make fuel for a medical isotope reactor.

Western officials and U.N. inspectors doubt Iran’s explanation since it lacks the technical capacity to convert higher-enriched uranium into fuel rods for the reactor, whose Argentine-provided fuel stock is running out.

They fear Iran wants to advance along the road to producing high-enriched — 90 percent purity — uranium suitable for the fissile core of an atomic bomb, if it chose later to do so.

Diplomats also questioned why Iran had moved 94 percent — 1.95 tonnes of its LEU reserve out of its main, subterranean enrichment plant at Natanz, a much larger amount than would be needed to produce fuel for the reactor in the medium term.

“(This) was merely for producing material for the Iran research reactor. That is why that container is (now) back to its original location,” Ali Asghar Soltanieh, Iran’s ambassador to the International Atomic Energy Agency, told reporters.

A senior diplomat close to the IAEA confirmed the container had been returned underground but could not immediately say how much LEU had been used for higher-scale enrichment.

U.S. media have speculated that, in moving above ground an LEU stockpile Iranian officials have called a strategic asset, Iran thought of goading adversaries such as Israel, which views the Iranian nuclear program as an existential threat.

“For your information, (we) just moved the capsule because technically they needed it and they have put it back. We used the material which we needed for the Tehran Research Reactor,” Soltanieh said during a break in an IAEA governors meeting.

Diplomats there discounted the notion of political reasons for Iran having moved much of its LEU stockpile above ground.

“A more likely reason was that Iran needed a large container to provide a steady feed with sufficient pressure for 20 percent enrichment,” said one senior diplomat close to the IAEA.

“In any case, this container can be moved back and forth between the pilot and main Natanz facilities in a half hour.”

U.N. nuclear agency chief Yukiya Amano said a reactor fuel supply offer brokered by his predecessor Mohamed ElBaradei with Russia, France and the United States, was still open to Iran. Tehran has rejected a key clause requiring it to ship 70 percent of its LEU abroad.

“(It) is the balanced and realistic proposal. That’s why I support it and keep it on the table,” said Amano.”

(Editing by Jon Hemming)

In unusually blunt language, an International Atomic Energy Agency report for the first time suggested Iran was actively pursuing nuclear weapons capability, throwing independent weight behind similar Western suspicions.

The IAEA seemed to be cautiously going public with concerns arising from a classified agency analysis leaked in part last year which concluded that Iran has already honed explosives expertise relevant to a workable nuclear weapon.

The report also confirmed Iran had produced its first small batch of uranium enriched to a higher purity — 20 percent.

Both developments will intensify pressure on Iran to prove it is not covertly bent on “weaponizing” enrichment by allowing unfettered access for IAEA inspectors and investigators, something it rejects in protest at U.N. sanctions.

The United States is already leading a push for the U.N. Security Council to impose a fourth round of sanctions on Iran because of suspicions it may be developing nuclear weapons and has received declarations of support from Russia, which has until now been reluctant to expand sanctions.

“We always said that if Iran failed to live up to those international obligations, that there would be consequences,” White House spokesman Robert Gibbs told reporters aboard Air Force One as President Barack Obama flew to a political event.

A senior Obama administration official said the IAEA report showed an “increasing pattern of non-cooperation” by Iran with the U.N. watchdog. The report also documented “significant technical problems” that Iran continues to have with its nuclear program, the official told reporters.

Tehran says its nuclear program is meant only to yield electricity or radio-isotopes for agriculture or medicine. It took an opposing view of the report’s conclusions.

“The IAEA’s new report confirmed Iran’s peaceful nuclear activities and the country’s non-deviation toward military purposes,” Iran’s envoy to the IAEA, Ali Asghar Soltanieh, told the state news agency IRNA.

INTELLIGENCE REPORTS

For several years, the IAEA has been investigating Western intelligence reports indicating Iran has coordinated efforts to process uranium, test explosives at high altitude and revamp a ballistic missile cone in a way suitable for a nuclear warhead.

In 2007, the United States issued an assessment saying Iran had halted such research in 2003 and probably not resumed it.

But its key Western allies believe Iran continued the program — and the IAEA report offered independent support for that perception for the first time.

“The information available to the agency is extensive … broadly consistent and credible in terms of the technical detail, the time frame in which the activities were conducted and the people and organizations involved,” the report said.

“Altogether this raises concerns about the possible existence in Iran of past or current undisclosed activities related to the development of a nuclear payload for a missile.”

IAEA’s new chief, Yukiya Amano, is seen as more inclined to confront Iran than his predecessor, Mohamed ElBaradei, who retired on December 1.

“Now we see from (available intelligence) that certain activities may have continued after 2004,” said a senior official close to the IAEA. “We want to find out from Iran what they’ve had to do with these nuclear explosive-related activities.”

The U.S. director of National Intelligence concluded last year that Iran would not be technically able to devise a nuclear weapon before 2013. But a new intelligence estimate is due soon.

Iran has dismissed the intelligence reports cited by the IAEA as fabrication but failed to provide its own evidence. Tehran has boycotted contact with the IAEA on the matter for 18 months.

The report, to be considered at a March 1-5 meeting of the IAEA’s 35-nation board, said it was vital for Iran to cooperate with IAEA investigators “without further delay.”

HIGHER ENRICHMENT

Last week, Iran announced a start to higher-scale enrichment, saying it was frustrated at the collapse of an IAEA-backed plan for big powers to provide it with fuel rods for nuclear medicine made from uranium refined to 20 percent purity.

The IAEA report complained that Iran had begun feeding low-enriched uranium (LEU) into centrifuges for higher refinement before inspectors could get to the scene in the Natanz pilot enrichment facility.

“We have expressed our dissatisfaction,” said the senior official close to the IAEA. “It is of paramount importance to have this information in a timely way to make sure there are no undeclared activities or facilities in Iran.”

The big powers accused Iran of reneging on an agreement to ship out two-thirds of its LEU reserve to be turned into fuel rods for the medical reactor. This would have prevented Iran retaining enough of the material to fuel a nuclear weapon, if it were refined to about 90 percent purity.

Only France, one party to the U.N. draft deal, and Argentina are known to possess the technology. So analysts ask why Iran would enrich uranium well above its needs, except to lay the groundwork for producing bomb-grade uranium.

The report further said that Iran had increased its LEU stockpile by some 300 kg (660 pounds) to 2.06 tons since November — enough for one or two nuclear bombs if enriched to 90 percent purity.

The IAEA said over nine-tenths of the LEU stockpile had been earmarked for enrichment up to 20 percent, a significant mark as further enrichment up to 90 percent may need only a few months.

But the report also attested to stagnating capacity at Natanz. It said the number of operating centrifuges had dropped to 3,772 from nearly 4,000.

This was well under half of all the machines installed in Natanz, the report indicated. Analysts and diplomats close to the IAEA say Iran may be having serious mechanical problems in keeping thousands of antiquated centrifuges running in unison.

But the senior official said Iran appeared to be shifting focus to a second enrichment site at Fordow near Qom, which Iran has said will preserve the program if foes bomb Natanz.

(Editing by Eric Beech and John O’Callaghan)

It was the first time the International Atomic Energy Agency lent public support to Western suspicions that Israel’s target was a nascent nuclear reactor that Washington said was North Korean in design and geared to making weapons-grade plutonium.

Previous IAEA reports on its two-year investigation into the affair, impeded by a lack of Syrian cooperation, said only that the uranium particles raised concern because they did not come from Syria’s declared inventory.

“The presence of such particles points to the possibility of nuclear-related activities at the site and adds to questions concerning the nature of the destroyed building,” said the confidential report by new IAEA Director-General Yukiya Amano, obtained by Reuters.

“Syria has yet to provide a satisfactory explanation for the origin and presence of these particles,” he wrote, dismissing Damascus’s contention that the traces came with munitions used by Israel to wreck the complex.

In what analysts called another departure from predecessor Mohamed ElBaradei, Amano prodded Syria to adopt the IAEA’s Additional Protocol, which permits unfettered inspections beyond declared nuclear site to ferret out any covert atomic activity.

SYRIAN STONEWALL

U.N. inspectors examined the site at Dair Alzour in June 2008 but Syria has barred renewed access and also not let them visit three military sites, whose appearance was altered by landscaping after the IAEA first asked to check them.

The Vienna-based IAEA has also been checking whether there could be a link between the particles uncovered at Dair Alzour and similar unexplained traces detected in swipe samples taken at a Damascus nuclear research reactor later in 2008.

The report said Syria had refused a meeting in Damascus last month to address the issue. But inspectors now planned to visit the research reactor on February 23 to take more test samples and examine “relevant source documents related to the experiments.”

Some analysts say the Damascus findings raised the question whether Syria used some natural uranium intended for the alleged reactor at Dair Alzour in tests applicable to learning how to separate out bomb-grade plutonium from spent nuclear fuel.

Syria, an ally of Iran which is under IAEA investigation over nuclear proliferation suspicions, has denied ever having an atom bomb program and has said the intelligence is fabricated.

“Syria has not cooperated with the agency since June 2008 in connection with the unresolved issues related to the Dair Alzour site and the other three locations allegedly functionally related to it,” said the U.N. watchdog report.

“As a consequence, the Agency has not been able to make progress toward resolving the outstanding issues.”

The issue, along with the IAEA’s hardening concern about a possible covert Iranian nuclear weapons program, will be on the agenda of the first of four quarterly meetings by the IAEA’s 35-nation board of governors starting on March 1.

(Editing by Jon Hemming)

The rare removal of a senior serving diplomat on the International Atomic Energy Agency’s board of governors underlined the volatile politics and high stakes in policymaking involving Iran’s disputed nuclear program.

Malaysian Ambassador Mohd Arshad Manzoor Hussain, a 35-year diplomatic veteran, told Reuters he had been dismissed by his government after being recalled to Kuala Lumpur following the November 27 vote and several weeks of consultations.

Diplomats said the Malaysian government acted after the United States expressed concern to it over the envoy’s vote.

The Malaysian Foreign Ministry said in December that Hussain disregarded orders by voting “no” to a resolution passed by a 25-3 margin with six abstentions to censure Iran for building a second uranium enrichment plant in secret.

“I am very disappointed at this development as I had hoped my government would renew my contract to enable me to complete my mandate as chairman,” Hussain said in Vienna, where he had returned to await his government’s decision. “This has not happened and I just have to accept it as my fate.”

The IAEA board will hold a one-day meeting on Friday to appoint a successor, identified in a confidential memo obtained by Reuters as Muhammad Shahrul Ikram Yaakob, previously Malaysia’s ambassador in Qatar.

BREAKDOWN IN COMMUNICATION?

A senior diplomat close to the matter said Malaysia’s IAEA mission had been instructed to vote in line with the position of the Non-Aligned Movement of developing nations, which has historically opposed Western-driven international actions to isolate Iran, a fellow member of NAM.

Iran denies Western suspicions that it secretly seeks nuclear weapons and NAM has stood up for Iran’s proclaimed right to develop a sovereign civilian nuclear power industry.

When the vote was held, the diplomat said, Hussain was surprised to see NAM members Egypt, Pakistan and South Africa abstain, and India vote “yes.” Hussain had no time to double check policy with his capital, and so voted against as originally planned, the diplomat told Reuters.

He said Malaysian diplomats who attended NAM strategy talks before the vote in Hussain’s stead because he was busy with other duties as board chair briefed him that sentiment in the group against censuring Iran was widespread.

But another diplomat familiar with the issue said NAM states reached no consensus on how to deal with the resolution so the varying votes on the floor should not have been a surprise.

The other opposing votes were cast by Cuba and Venezuela, both U.S. foes unlike Malaysia. All Western board members, joined unusually by Russia and China, voted in favor.

Vienna diplomats said the overwhelming passage of the resolution suggested major developing states were souring on Iran over its nuclear secrecy and defiance of calls to open up to IAEA inspections.

(Editing by Janet Lawrence)