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* Iran still converting some sensitive nuclear material –

diplomats

* Move limits stockpile of controversial medium-enriched

uranium

* May help buy time for big power diplomacy with new Iranian

president

By Fredrik Dahl

VIENNA, Aug 19 (Reuters) – Iran appears to be holding back

growth of its most sensitive nuclear stockpile by continuing to

convert some of it into reactor fuel, diplomats said on Monday,

potentially giving more time for negotiation with world powers.

The stock of medium-enriched uranium gas is closely watched

in the West; Israel has threatened to attack if diplomacy fails

to curb Iran’s programme and it amasses enough of the material –

a short technical step from weapons-grade – to make a bomb.

The Islamic state says its programme is for power generation

and medical purposes only, but the election of the relative

moderate Hassan Rouhani as president has raised hopes that talks

to address the decade-old nuclear dispute could be unblocked.

Since Iran in 2010 began enriching uranium to a 20 percent

concentration of the fissile isotope, it has produced more than

the 240-250 kg that would be needed for one weapon.

But it has kept the stockpile below the stated Israeli “red

line” by converting part of the uranium gas into oxide powder in

order, it says, to yield fuel for a medical research reactor.

The diplomats, accredited to the United Nations’

International Atomic Energy Agency (IAEA), said Iran might even

have stepped up this conversion in recent months.

If this is confirmed in the IAEA’s quarterly report, due

around Aug. 27-28, the inventory of 20 percent gas will rise by

less than the output, which has been about 15 kg per month.

One of the diplomats suggested the stockpile may show little

or even no growth during the last three months, saying:

“Everyone expects there to be as much or more conversion.”

But he and others cautioned against seeing it as a signal by

the new Iranian president as the uranium conversion began in

late 2011.

Iran’s stockpile of 20 percent uranium gas amounted to 182

kg in May, according to the IAEA’s last report, an increase of 9

percent since February but still well below the “red line” set

by Israel, believed to be the region’s only nuclear weapons

power.

While the conversion activity may help to push back any

Israeli decision on whether to attack Iranian nuclear sites,

Western diplomats say Iran needs to do much more to allay

suspicions about its atomic programme. They note that uranium

oxide powder can be converted back into gas form relatively

quickly.

The six powers negotiating with Iran – the United States,

France, Germany, Britain, China and Russia – want it to stop

enriching uranium to 20 percent and suspend work at the

underground Fordow site where most of this activity is pursued.

Rouhani, a former nuclear negotiator who oversaw a previous

deal to suspend Iran’s uranium enrichment, has pledged to

improve ties with the outside world and secure an easing of

international sanctions.

But he insists on Iran’s right to refine uranium, and the

government has made clear that it would expect a major easing of

sanctions, which are hurting its oil-dependent economy, in

exchange for any agreement to curb enrichment.

(Editing by Kevin Liffey)