By Andrew Quinn and Justyna Pawlak

BAGHDAD, May 25 (Reuters) - Iran and world powers agreed to meet again next month to try to ease the long standoff over its nuclear work despite achieving scant progress at talks in Baghdad towards resolving the main sticking points of their dispute.

At its heart is Iran's insistence on right to enrich uranium and that economic sanctions should be lifted before it shelves activities that could lead to its achieving the capability to develop nuclear weapons.

Western powers insist Tehran must first shut down higher-grade enrichment before sanctions could be eased.

But both sides have powerful reasons not to abandon diplomacy. The powers want to avert the danger of a new Middle East war raised by Israeli threats to bomb Iran, while Tehran also wants to avoid a looming Western ban on its oil exports.

After discussions in Baghdad extended late into an unscheduled second day on Thursday between envoys from Iran and the six powers, European Union foreign policy chief Catherine Ashton said it was clear both sides wanted progress and had some common ground, but significant differences remained.

"We will maintain intensive contacts with our Iranian counterparts to prepare a further meeting in Moscow," she told a news conference in Baghdad.

The next meeting, the third in the latest round of talks that began in Istanbul last month after a diplomatic vacuum of 15 months, will be held in Moscow on June 18-19.

Ashton leads the negotiations for the six-country group made up of the five permanent members of the U.N. Security Council - Britain, China, France, Russia and the United States - which together with Germany is known as the P5+1.

"Talks were intensive and long," Saeed Jalili, Iran's chief negotiator and direct representative of Supreme Leader Ayatollah Ali Khamenei, said. "They were detailed, but left unfinished.

"The atmosphere of these talks was positive for the two sides to talk about their issues in a clear way," Jalili added. "We believe the result of these talks was that we were able to get to know each other's views better and more."

While there was little if any concrete progress, the fact that the two sides agreed to continue talks was a sign of progress in itself, after more than a year of not meeting at all before the latest round of negotiations began in April.

"The two sides' commitment to diplomacy in the absence of any clear agreement is a positive sign," said Ali Vaez, Iran expert at the International Crisis Group think-tank.

"All parties should be commended for returning to the negotiating table. (U.S. President Barack) Obama should be commended for having turned diplomacy into a process rather than the one-off meetings that existed in the past," wrote Trita Parsi, president of the National Iranian American Council.

"Both sides entered negotiations with their maximalist positions, and neither budged. Looking ahead, now the hard work begins."

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

The sceptical powers want practical steps from the Islamic Republic to address their concerns over its nuclear programme.

Chief among such concerns is Iran's ability to enrich uranium to a fissile concentration of 20 percent. That is the nuclear advance most worrying to the West since it opens the way to reaching 90 percent, or bomb-grade, enrichment.

"Iran declared its readiness to address the issue of 20 percent enrichment and came with its own five-point plan, including their assertion that we recognise their right to enrichment," Ashton said.


IRAN INSISTS ON ITS RIGHTS

Iran says it will not exceed 20 percent and the material will be made into fuel for a research reactor.

Iran has hinted at flexibility on higher-grade enrichment but Iranian media said it would not give away its most potent bargaining chip without significant concessions on sanctions.

"We never expected to get that agreement (on 20 percent) here in Baghdad," said a senior U.S. administration official who declined to be identified due to the sensitivity of the subject.

But, he said "there is agreement to address all aspects of 20 percent as we put it on the table".

A significant difference between the two sides is Iran's insistence on what Jalili called "an undeniable right of the Iranian nation" to enrich uranium.

"Obviously (that) was not something we were prepared to do," the official said, echoing the U.S. view that Iran does not automatically have this right under international law because, it argues, Iran has violated obligations under counter-proliferation safeguards by having hidden sensitive nuclear activity from U.N. inspectors in the past.

The United States and its allies have imposed tough sanctions on Iran's energy and financial sectors to try to force it to compromise and open up its nuclear activities to scrutiny.

EU states are set to introduce a total embargo of Iranian crude oil purchases in July. Diplomats say the measure will not be cancelled unless Tehran acts to rein in enrichment first.

Iranian Oil Minister Qasem Rostani dismissed the threat of an oil embargo, saying Tehran's adversaries would suffer more in the form of soaring crude prices.

"With the absence of Iran's oil in global markets, something will happen to the global economy that will greatly reduce economic growth of developing and developed countries. The world is concerned about this issue today," Rostami said on Friday.

"I hope they (the West) understand what would happen if Iran's oil is no longer in the market. If they are wise, they would learn from this period of time when oil prices jumped with only talks of sanctions..."

U.S. Secretary of State Hillary Clinton said there would be no let-up in sanctions against Iran, even as talks continue.

The senior U.S. official said the six powers were going to try to advance the talks "as fast as we can". But it was too early to talk about technical level or expert meetings because the broader political issues still needed to be clarified.

The official said sanctions coming into effect in coming weeks would increase leverage on Iran in the negotiations.

"Maximum pressure is not yet being felt by Iran," the official said, adding there were many other potential sanctions that remained to be employed.


WORRIES ABOUT WAR

The powers want Iran to send its more highly refined uranium abroad, close an underground plant devoted to 20 percent enrichment which is largely invulnerable to air strikes and submit to more intrusive U.N. nuclear inspections.

In return, they have offered fuel to keep Iran's medical isotope reactor running, assistance in nuclear safety and an end to a ban on spare parts for Iran's ageing civilian aircraft.

A senior hardline Iranian cleric was dismissive. "They keep saying Iran should take confidence-building steps. How many times should Iran do this? You have inspected our nuclear sites a number of times and have not found anything," Ahmad Khatami said in a sermon at Friday prayers in Tehran.

"The P5+1 should know that the Iranian nation is not the kind to submit to blackmail and ... that (our) people are here and are standing firm on their rights."

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. (Additional reporting by Patrick Markey and William Maclean in Baghdad, Marcus George and Isabel Coles in Dubai, Zahra Hosseinian in Zurich, Fredrik Dahl in Vienna and Paul Eckert in Washington; Writing by Jon Hemming; Editing by Mark Heinrich)

SANCTIONS ON IRAN:
Loading Slideshow...
  • <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.