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* Iran says needs 20 percent uranium to fuel reactor

* West worries material could be used to make atomic bombs

* Stockpile still below Israeli “red line” for action

By Fredrik Dahl

VIENNA, May 6 (Reuters) – Iran appears to be pressing ahead

in using some of its most sensitive nuclear material to make

reactor fuel, diplomats said on Monday, a step that could help

buy time for diplomacy between Tehran and world powers.

Iran’s possession of medium-enriched uranium gas is closely

watched in the West as Israel, which has threatened to attack

its arch-foe if diplomacy fails to stop its nuclear drive, says

it must not amass enough for one bomb if further processed.

Since Iran in 2010 began refining uranium to a fissile

concentration of 20 percent – a relatively short technical step

away from the level required for nuclear arms – it has produced

more than the 240-250 kg which would be needed for one weapon.

But while the stockpile has expanded, Iran has still kept it

below the Israeli “red line” by converting part of the uranium

gas into oxide powder in order, Tehran says, to yield fuel for a

medical research reactor in the Iranian capital.

Three diplomats said they believed Iran had continued this

activity – thereby slowing the growth of the amount of 20

percent uranium gas – since the U.N. atomic agency issued its

last report on Tehran’s nuclear programme in February.

“Our impression is that it is fairly steady what they are

doing,” one Western official said. Another envoy said: “I think

they are trying to demonstrate that their conversion is a

significant amount, an amount that (Iran believes) should ease

the concern of the international community.”

If this is confirmed in the next report on Iran by the U.N.

International Atomic Energy Agency (IAEA), expected in late May,

the increase in the holding of 20 percent gas will be less than

the production, which has amounted to about 15 kg per month.

In February, the stockpile stood at some 167 kg.

WEST WANTS MORE

Critics say Iran is trying to achieve the ability to make

atomic bombs. The Islamic Republic denies this, saying says it

needs nuclear power for energy generation and medical purposes.

But while the uranium conversion activity may postpone any

decision by Israel on whether to strike Iranian nuclear sites,

the diplomats made clear Tehran must do much more in order to

allay Western suspicions about its atomic programme.

“Simply converting is not enough,” one of them said.

Turning uranium gas into oxide powder in order to make fuel

plates for the Tehran research reactor may be just a temporary

positive development because the process could be reversible,

Western experts say.

Iran could reconvert its entire inventory of 20 percent

enriched oxide powder into gas “in a matter of a few weeks,”

said Mark Hibbs of the Carnegie Endowment think-tank.

“Reconversion is not hard,” said Mark Fitzpatrick of the

International Institute for Strategic Studies think-tank.

“Once the initial hiccups are overcome, the chemical process

is straightforward.”

But Iran’s uranium oxide powder, like its other nuclear

material, would be under IAEA safeguards and its inspectors

would notice if it was being transformed back into gas form,

unless it was done at a secret facility, experts say.

Were Iran to inform the IAEA that it intended to reconvert

the material into gas form, “that step would immediately

precipitate a crisis,” Hibbs said.

Israeli Prime Minister Benjamin Netanyahu has said Iran was

“continuing to get closer to the red line”.

The six world powers involved in diplomacy with Iran want it

to stop enriching uranium to 20 percent and suspend work at the

underground Fordow site where most of this activity is pursued.

In their last meeting in early April, Iran refused the

powers’ demand. The two sides’ chief negotiators will meet again

on May 15 in Istanbul.

(Editing by Mark Heinrich)