IAEA set to report Iran defies U.N. atom halt demand

VIENNA (Reuters) - Iran faces the risk of sanctions after a U.N. nuclear watchdog report on Thursday likely to find that Tehran has ignored a deadline to halt an atomic fuel program Western leaders say could lead to bombs.

Ahead of the August 31 deadline, Tehran vowed "never" to scrap the project and dedicated one of its cornerstones, a heavy-water production plant, for good measure. It also continues to enrich uranium in small quantities at a pilot plant, diplomats say.

The U.N. Security Council asked International Atomic Energy Agency chief Mohamed ElBaradei to spell out if the Islamic Republic had heeded the deadline set in a July 31 resolution.

"The outcome is obvious. No one really expected otherwise," a senior diplomat close to the IAEA said when asked if ElBaradei would judge Iran in defiance of the Security Council.

Diplomats said Washington felt the 30-day grace period given Iran was a fair chance for it to change its mind and if it did not, veto-holding Russia and China could be won over to backing Council sanctions once the deadline expired.

But Iran's deft August 22 reply to an offer of incentives not to pursue enrichment, hinting it could curb the work as a result of talks but not as a precondition, is sorely testing the shaky united front of six big powers handling Tehran's case.

Russia and China have called for a return to talks while key Council allies of Washington, Britain and France, have dampened U.S. predictions of a swift resort to sanctions next month.

Two Western diplomats said some EU states were pushing for discussions with Iran on specifics of its reply even if the Iranians flouted the Security Council deadline as expected.

"This is to gain more time and postpone the expected sanctions," one of the diplomats said.

EU foreign policy chief Javier Solana's spokeswoman said he might speak by telephone with Iranian chief negotiator Ali Larijani before the deadline passed, and they could meet afterward, to try to clarify Tehran's complex 21-page reply.

Gary Samore, chief global security analyst at Chicago's MacArthur Foundation, said a no-nonsense ElBaradei report could buoy Western arguments for resorting to sanctions.

"But Iran has obviously decided to press ahead, calculating that the Council is incapable of reaching agreement on serious economic sanctions and that sanctions outside the U.N. (mooted by a frustrated Washington) will not be effective," he said.

"NO ONE CAN STOP IT"

Iranian President Mahmoud Ahmadinejad was as matter-of-fact as ever on Tuesday. "Peaceful nuclear energy is the right of the Iranian nation ... and no one can stop it," he told reporters.

The IAEA has also been looking into concerns that Iran's official agenda to make nuclear fuel only for electricity may be a civilian facade for a military quest to make atom bombs.

Probe targets since 2003 include plutonium experiments, alleged administrative links between processing of uranium ore, explosives tests and a missile warhead design, and black-market acquisitions of parts for centrifuge enrichment machines.

ElBaradei's report may state that Iran has stonewalled the myriad inquiries to a standstill, one senior diplomat said.

Iran has been withholding answers to IAEA questions as bargaining chips for any crunch talks with the big powers, diplomats say, and of late has slashed cooperation with IAEA inspectors to a legal -- but problematic -- minimum.

ElBaradei will also update the Council on Iran's pilot enrichment program at Natanz. In April, Tehran purified uranium to the low level needed for power plant fuel for the first time, using a cascade of 164 interconnected centrifuges.

But enrichment work has slowed since then, apparently due to quality-control problems, diplomats told Reuters.

"Iran is running barely any uranium through the centrifuges at all now," said one diplomat. "The difference between what the Security Council is demanding and what Iran is doing may be pretty small."