By Andrew Quinn and Justyna Pawlak

BAGHDAD, May 24 (Reuters) - Iran accused world powers on Thursday of creating "a difficult atmosphere" that had hindered talks on its atomic energy programme, signalling a snag in diplomacy to defuse fears of a covert Iranian effort to develop nuclear bombs.

The nub of the dispute appeared to be Iran's demand for fast relief from economic sanctions as part of any deal for it to stop higher-grade uranium enrichment, a pathway to nuclear arms, whereas Western powers insisted Tehran must first shut it down.

But there was no sign of either breakdown or breakthrough in the talks that European Union foreign policy chief Catherine Ashton, representing the six powers, and Iranian chief delegate Saeed Jalili extended well into a second day.

Both sides had a compelling interest not to let diplomacy collapse. The powers want to head off the danger of a new Middle East war raised by Israeli threats to bomb Iran while Tehran is scrambling to avert a looming Western ban on its oil exports.

Washington voiced cautious hope on Wednesday that Iran was finally engaging the powers on detailed, transparent ways of proving its nuclear work, after years of secrecy and evasions of U.N. investigations, would be for peaceful purposes only.

The over-arching goal of the six big powers jointly negotiating with the Islamic Republic is an Iranian agreement to scale back its uranium enrichment in a transparent way to ensure it cannot be diverted to bombmaking.


BIG POWERS' PROPOSAL

Atop the wish list in the powers' proposal to Iran is for it to stop enriching uranium to a fissile purity of 20 percent.

That is the nuclear advance most worrying to the West since it hurdles technical obstacles to reaching 90 percent, or bomb-grade, enrichment. Iran says it will not exceed 20 percent and the material will be made into fuel for a research reactor.

The powers also want Iran to send its stocks of higher-refined uranium abroad and close an underground plant devoted to 20 percent enrichment and largely invulnerable to air strikes.

In return, the United States, Russia, China, France, Britain and Germany have offered fuel to keep the medical isotope reactor running, assistance in nuclear safety and an end to an embargo on spare parts for Iran's ageing civilian aircraft.

Western diplomats ruled out any sanctions reprieve before Iran carried out its part of the deal in a verifiable manner, underlining the mutual mistrust accumulated over the course of a decade-long standoff.

But Iranian media close to Tehran's delegation said it was insisting on a "principle of "reciprocity" of concessions they said was promised by the powers in preparatory talks in Istanbul last month but was not guiding the Baghdad negotiations.

An Iranian delegate who asked not to be named poured cold water on hints from Western diplomats that the sides appeared to be nearing common ground on ideas for an outline deal.

"What we heard in Istanbul was more interesting," he said. "We believe the reason (the powers) are not able to reach a result is America. (They) came to Baghdad without a clear mandate so we think the atmosphere is difficult."

Tehran wants any nuclear deal to spare it from an EU embargo on its vital oil exports due to be phased in fully by July 1, a potentially crippling economic blow, and also sees a rollback of trade and diplomatic sanctions imposed since 2006.

Jalili countered the big powers' proposal with a five-point package of initiatives covering a wide range of nuclear and non-nuclear issues, according to Iranian media.

Western diplomats said Jalili's proposal lacked concrete detail and included elements of no use in resolving concerns about the Islamic Republic's nuclear ambitions.

"They are pushing back on enrichment and asking us to engage their plan," another Western diplomat said. "It is pretty tough going, but I don't think anyone ever expected anything else. We are moving forward, we are talking about the substance, we are looking for areas of common ground."

Iranian officials have hinted at flexibility on higher-grade enrichment, although analysts say Tehran would be unlikely to compromise much while major sanctions remain in place.


WORRIES ABOUT WAR

Increasing tensions have thrust global oil prices upward as the West has extended sanctions to block Iran's crude exports and the spectre of Middle East conflict has risen from possible Israeli strikes on Iran's fortified nuclear installations.

Under the nervous scrutiny of oil markets and Iran's arch-enemy Israel - believed to be the only Middle East country with nuclear weapons, the two sides met for a full day on Wednesday, negotiating deep into the night.

Iran, the world's No. 5 oil exporter, says it is enriching uranium only for electricity to serve the needs of a burgeoning population, and for a medical research reactor.

The Islamic Republic has repeatedly ruled out suspending all enrichment as called for by several U.N. Security Council resolutions, saying nuclear energy is a matter of national sovereignty and pride in technological progress.

In the absence of diplomatic breakthrough, Iran appeared to be putting "more facts on the ground" to increase its leverage.

A U.N. nuclear agency report due in the next few days is expected to show that Iran has installed more uranium enrichment centrifuges at an underground site, potentially boosting output capacity of nuclear work global powers want it to stop.

(Additional reporting by Patrick Markey and William Maclean in Baghdad, Marcus George in Dubai, Fredrik Dahl in Vienna and Steve Gutterman in Moscow; Writing by Mark Heinrich; Editing by Angus MacSwan)

SANCTIONS ON IRAN:
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  • <em>In this Saturday, Nov. 12, 2011 photo, Iranian women and a man weave carpet in a workshop in Qom, 78 miles (125 kilometers) south of the capital Tehran, Iran. (AP Photo/Vahid Salemi)</em><br><br> Initial sanctions were imposed after Iranian students stormed the U.S. embassy and took diplomats hostage in 1979. Iranian products cannot be imported into the United States apart from small gifts, information material, food and some carpets.

  • <em>Former President Bill Clinton addresses the audience during the opening night dinner of the World Summit of Nobel Peace Laureates at the Field Museum Monday, April 23, 2012, in Chicago. (AP Photo/Charles Rex Arbogast)</em><br><br> In 1995, President Bill Clinton issued executive orders preventing U.S. companies from investing in Iranian oil and gas and trading with Iran. The same year, Congress passed a law imposing sanctions on foreign companies investing more than $20 million a year in Iran's energy sector.

  • <em>In this Thursday, Oct. 30, 2008 file photo, an Iranian money changer holds currency with Ayatollah Ruhollah Khomeini's image in Tehran, Iran. (AP Photo/Hasan Sarbakhshian, File)</em><br><br> In October 2007, Washington imposed sanctions on three Iranian banks and branded the Islamic Revolutionary Guards Corps a proliferater of weapons of mass destruction. The Treasury has since added numerous other Iranian banks to its blacklist. The Treasury has identified about 20 petroleum and petrochemical companies as being under Iranian government control, an action that put them off-limits to U.S. businesses under the trade embargo.

  • <em>This photo shows a branch of Iranian Bank Tejarat in Tehran on January 24, 2012 upon which the US Treasury announced sanctions claiming all of the Islamic Republic's major state-owned banks have now been subjected to punitive measures. (ATTA KENARE/AFP/Getty Images)</em><br><br> Congress approved tough new unilateral sanctions on June 24, 2010, aimed at squeezing Iran's energy and banking sectors. The new law imposed penalties on companies that supply Iran with refined petroleum products worth more than $5 million a year. It also effectively deprived foreign banks of access to the U.S. financial system if they did business with Iranian banks or the Revolutionary Guards.

  • <em>Oil workers gather by an oil well operated by Venezuela's state-owned oil company PDVSA in Morichal, Venezuela, on July 28, 2011. (RAMON SAHMKOW/AFP/Getty Images)</em><br><br> In May 2011, the United States announced new sanctions on Venezuela's state oil company, PDVSA, and six other smaller oil and shipping firms for trading with Iran in violation of the U.S. ban, prompting fury from Hugo Chavez's government.

  • June 2011

    <em>Members of Iran's paramilitary Basij militia parade in front of the former US embassy in Tehran on November 25, 2011 to mark the national Basij week. (ATTA KENARE/AFP/Getty Images)</em><br><br> On June 11, it announced new sanctions on the Revolutionary Guards, the Basij Resistance Force, and Iran's law enforcement forces. The sanctions froze any of the targets' assets under U.S. jurisdiction and barred U.S. persons and institutions from dealing with them.

  • <em>Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner (L) announce new sanctions against Iran at the State Department on November 21, 2011 in Washington, DC. (Photo by Mark Wilson/Getty Images)</em><br><br> On Nov. 21 the United States named Iran as an area of "primary money-laundering concern", a step designed to dissuade non-U.S. banks from dealing with it. The United States also blacklisted 11 entities suspected of aiding its nuclear programmes and expanded sanctions to target companies that aid its oil and petrochemical industries.

  • <em>US President Barack Obama (C) greets guests after speaking on nuclear security, touching on subjects from terrorism to Iran and North Korea, during a visit to Hankuk University of Foreign Studies in Seoul on March 26, 2012. (SAUL LOEB/AFP/Getty Images)</em><br><br> On Dec. 31, 2011, President Barack Obama signed into law a defense funding bill that imposed sanctions on financial institutions dealing with Iran's central bank, which is the main conduit for oil revenues. Sanctioned institutions would be frozen out of the U.S. financial markets.

  • <em>Hostesses stand in front of the construction site of the Saudi Basic Industries Corp. (SABIC) Technology Centre and Greater China Headquarters in Shanghai, China Friday, April 6, 2012. (AP Photo/Eugene Hoshiko)</em><br><br> On Jan. 13, 2012 the United States extended sanctions to Chinese state-run energy trader Zhuhai Zhenrong Corp, which it said was Iran's largest supplier of refined petroleum products. It also imposed sanctions on Singapore's Kuo Oil Pte Ltd and United Arab Emirates-based FAL Oil Company Ltd.

  • <em>Members of Iranian Revolutionary Guards attend a ceremony at the mausoleum of the late revolutionary founder Ayatollah Khomeini, commemorating 33rd anniversary of his return from exile after 14 years, and the 1979 Islamic Revolution which toppled pro-US Shah Mohammad Reza Pahlavi, just outside Tehran, Iran, Wednesday, Feb. 1, 2012. (AP Photo/Vahid Salemi)</em><br><br> The United States exempted Japan and 10 European Union nations from financial sanctions on March 20 because they had significantly cut purchases of Iranian oil, but Iran's top customers China and India remain at risk of such steps. On March 28 the Treasury set additional sanctions against Iranian engineering firms with ties to the Revolutionary Guards, as well as individuals and shipping companies with ties to the Islamic Republic of Iran Shipping Lines (IRISL).

  • <em>In this Sept. 27, 2000 file photo, an Iranian oil worker repairs a pipe at an oil refinery in Tehran. (AP Photo/Vahid Salemi, File)</em><br><br> On May 21 the Senate approved the latest tightening of sanctions on Iran's oil trade.

  • <em>In this Jan. 19, 2012 file photo, fishing boats are seen in front of oil tankers on the Persian Gulf waters, south of the Strait of Hormuz, offshore the town of Ras Al Khaimah in United Arab Emirates. (AP Photo/Kamran Jebreili)</em><br><br> On Aug. 12, 2010 the EU banned the creation of joint ventures with enterprises in Iran engaged in the oil and natural gas industries. Member states must prohibit the provision of insurance and re-insurance to the government of Iran. The import and export of arms and equipment that could contribute to uranium enrichment, or have a "dual use", is banned. The sanctions forbid the sale, supply or transfer of energy equipment and technology used by Iran for exploration and production or for refining or liquefying natural gas. The EU expects the effects of the sanctions to increase over time as existing parts wear out.

  • <em>EU foreign policy chief Catherine Ashton speaks during a media conference after a meeting of EU foreign ministers at the EU Council building in Brussels on Monday, Jan. 23, 2012. (AP Photo/Virginia Mayo)</em><br><br> In May 2011, EU foreign ministers added 100 new entities to a list of companies and people affected, including those owned or controlled by IRISL. Last October, the EU imposed sanctions on 29 people, extending the list targeting individuals associated with human rights violations to 61. On Dec. 1, the EU added 180 Iranians and entities to a sanctions blacklist that imposes asset freezes and travel bans on those involved in the nuclear program.

  • <em>In this March 13, 2008 file photo, gold coins and bars are shown at California Numismatic Investments in Inglewood, Calif. (AP Photo/Nick Ut, File)</em><br><br> On Jan. 23, 2012 the EU placed an immediate ban on all new contracts to import, purchase or transport Iranian crude oil and petroleum products. EU countries with existing contracts to buy oil and petroleum products were allowed to honor them until July 1. The EU also agreed to freeze the assets of Iran's central bank and ban trade in gold and other precious metals with the bank and state bodies.

  • <em>British Ambassador to the UN Mark Lyall Grant (C) speaks during a vote on broader military and financial sanctions on Iran over its suspect nuclear program during a UN Security Council at the UN headquarters June 9, 2010 in New York. (EMMANUEL DUNAND/AFP/Getty Images)</em><br><br> The Security Council has imposed four sets of sanctions on Iran, in December 2006, March 2007, March 2008 and June 2010. The first covered sensitive nuclear materials and froze the assets of Iranian individuals and companies linked with the nuclear program.

  • <em>A military truck carries a Sejil rocket as it is paraded during the annual Army Day military parade in Tehran on April 17, 2012. (ATTA KENARE/AFP/Getty Images)</em><br><br> The second included new arms and financial sanctions. It extended an asset freeze to 28 more groups, companies and individuals engaged in or supporting sensitive nuclear work or the development of ballistic missiles.

  • <em>Iranian President Mahmoud Ahmadinejad adjusts his goggles as he tours an exhibition on laser technology in Tehran on February 7, 2010. (ATTA KENARE/AFP/Getty Images)</em><br><br> The third, in 2008, increased travel and financial curbs on individuals and companies. It expanded a partial ban on trade in items with both civilian and military uses to cover sales of all such technology to Iran.

  • <em>A street money exchanger, puts US dollars in a plastic bag, in Ferdowsi St. in downtown Tehran, Iran, Wednesday, Dec. 21, 2011. (AP Photo/Vahid Salemi)</em><br><br> A Security Council resolution passed on June 9, 2010, called for measures against new Iranian banks abroad if a connection to the nuclear or missile programmes was suspected.

  • <em>Soldiers of the Iranian Revolutionary Guard walk past a satirical drawing of Statue of Liberty on the wall of the former US Embassy in Tehran, Iran, Friday, Nov. 25, 2011. (AP Photo/Vahid Salemi)</em><br><br> It expanded a U.N. arms embargo against Tehran and blacklisted three firms controlled by IRISL and 15 belonging to the Revolutionary Guards. The resolution called for the setting up of a cargo inspection regime.