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)