By Louis Charbonneau, Fredrik Dahl and Justyna Pawlak
GENEVA, Nov 8 (Reuters) - Israel rejected out of hand on Friday a mooted deal between world powers and Iran, just as U.S. Secretary of State John Kerry prepared to join nuclear talks that aim to nail down an interim agreement on the decade-old standoff.
Western diplomats say that a deal at the negotiations in Geneva is far from certain, and it would in any case mark only the first step in a long process towards settling the dispute over Tehran's nuclear program.
Nevertheless, Israeli Prime Minister Benjamin Netanyahu said Iran would be getting "the deal of the century" in the talks between Tehran and six powers.
"Israel utterly rejects it and what I am saying is shared by many in the region, whether or not they express that publicly," Netanyahu told reporters.
"Israel is not obliged by this agreement and Israel will do everything it needs to do to defend itself and the security of its people," he said before meeting Kerry in Jerusalem.
Israel has repeatedly warned that it might strike Iran if it did not halt the nuclear program, accusing Tehran of seeking to build atomic weapons. Iran says its various nuclear facilities are geared only to civilian needs.
Tehran is trying to win respite at the talks from international sanctions which are strangling its economy. The United States has said world powers will consider relaxing some of the sanctions if Iran takes verifiable steps to limit its nuclear program.
Iran and the powers are discussing a partial suspension deal covering only a limited period. It would be the first stage in a process involving many rounds of negotiations in the next few months aimed at securing a permanent agreement.
The core of that first stage would be freeing up cash frozen in foreign accounts for years, giving Iran access to funds.
Netanyahu was meeting Kerry for the third time in barely 48 hours. The U.S. secretary of state was due to fly immediately afterwards to Geneva where Iran and six world powers are holding negotiations. These are the five permanent members of the U.N. Security Council - the United States, Russia, China, France and Britain - plus Germany.
Israel has called for the sanctions to remain in place until Iran has dismantled its entire uranium enrichment program. "I understand that the Iranians are walking around very satisfied in Geneva - as well they should be, because they got everything and paid nothing," Netanyahu said.
Kerry, on a Middle East tour, will fly to the Swiss city at the invitation of European Union foreign policy chief Catherine Ashton in "an effort to help narrow differences" in the negotiations, a senior State Department official said.
Ashton is coordinating talks with Iran on behalf of the six.
After the first day of meetings set for Thursday and Friday, both sides said progress had been made.
U.S President Barack Obama said the international community could slightly ease sanctions against Iran in the early stages of negotiating a comprehensive deal.
"There is the possibility of a phased agreement in which the first phase would be us ... halting any advances on their nuclear program ... and putting in place a way where we can provide them some very modest relief, but keeping the sanctions architecture in place," he said in an interview with NBC News.
Kerry said earlier in Israel that Tehran would need to prove its atomic activities were peaceful, and that Washington would not make a "bad deal, that leaves any of our friends or ourselves exposed to a nuclear weapons program".
"We're asking them to step up and provide a complete freeze over where they are today," he said on Thursday.
In Geneva, Iranian Deputy Foreign Minister Abbas Araqchi was cautious on the chances of a deal. "Too soon to say," he told reporters on Thursday after the first day of talks.
"I'm a bit optimistic," he added. "We are still working. We are in a very sensitive phase. We are engaged in real negotiations."
The fact that an agreement may finally be within reach after a decade of frustrated efforts and hostility between Iran and the West was a sign of a dramatic shift in Tehran's foreign policy since the election of a relative moderate, Hassan Rouhani, as Iranian president in June.
The Islamic Republic, which holds some of the world's largest oil and gas reserves, wants the powers to lift increasingly tough restrictions that have slashed its daily crude sales revenue by 60 percent in the last two years.
Both sides have limited room to manoeuvre, as hardliners in Tehran and hawks in Washington would likely sharply criticize any agreement they believed went too far in offering concessions to the other side.
Lending urgency to the need for a breakthrough was a threat by the U.S. Congress to pursue tough new sanctions on Iran.
Obama has been pushing Congress to hold off on more sanctions against Iran, demanded by Israel, to avoid undermining the diplomacy aimed at defusing fears of an Iranian advance towards nuclear arms capability.
But many U.S. lawmakers, including several of Obama's fellow Democrats, believe tough sanctions brought Iran to the negotiating table and that more are needed to discourage it from building a nuclear bomb.
Iran's foreign minister and chief negotiator, Mohammad Javad Zarif, suggested a partial suspension of Iran's contested uranium enrichment campaign might be possible - a concession it had ruled out before Rouhani's landslide election.
"There won't be a suspension of our enrichment program in its entirety," Zarif told CNN, rejecting Israel's central demand.
But he said he hoped the sides would agree on a joint statement on Friday stipulating a goal to be reached "within a limited period of time, hopefully in less than a year", and a series of reciprocal actions they would take "to build confidence and address their most immediate concerns".
The United States said it also held "substantive and serious" bilateral talks with Iran in Geneva - direct dialogue inconceivable before Rouhani took office pledging to build bridges abroad and end a slide towards conflict with the West.
Iran and the United States have had no diplomatic ties since soon after the 1979 Islamic Revolution that overthrew the U.S.-backed monarchy, and their mutual mistrust and enmity have posed the biggest obstacle to any breakthrough nuclear accord. (Additional reporting by Yeganeh Torbati in Geneva, Timothy Gardner in Washington, Marcus George in Dubai, Michelle Nichols in New York and Crispian Balmer in Jerusalem; Writing by David Stamp; Editing by Alastair Macdonald)