By Fredrik Dahl
VIENNA, Nov 14 (Reuters) - Since Hassan Rouhani became president, Iran has halted a rapid expansion of its uranium enrichment capacity, a U.N. inspection report showed on Thursday, in a potential boost for diplomacy to end Tehran's nuclear dispute with the West.
The quarterly report by the International Atomic Energy Agency (IAEA) also said no further major components had been added to a potential plutonium-producing reactor since August.
The marked slowdown in the growth of activities of possible use in developing nuclear bombs may be intended to back up Rouhani's warmer tone towards the West after years of worsening confrontation, and strengthen Tehran's hand in negotiations with world powers due to resume on Nov. 20.
Iran stopped increasing its capacity to refine uranium - which can fuel nuclear power plants but also bombs if processed much more - "when their team changed" in August, a senior diplomat said, referring to Rouhani and his administration.
But Israeli Prime Minister Benjamin Netanyahu - who strongly opposes any deal with Iran short of dismantling its enrichment programme - said he was "not impressed".
Israel, believed to be the Middle East's sole nuclear-armed power, has long warned it could use force to prevent Iran from gaining an atomic bomb.
"I am not impressed with reports that we hear that Iran has not expanded its nuclear facilities and the reason for that is they don't need to. They've got enough facilities, enough centrifuges to develop and to complete the fissile material which is at the core of an atomic bomb," Netanyahu said.
The Arak reactor, which Iran previously said it would start up in the first quarter of 2014 but later postponed, is of great concern for Western powers as it could yield weapons-grade plutonium once it is operating. It was a major sticking point in talks between Iran and the powers in Geneva last week.
Iran has "more or less frozen" construction of the heavy water reactor, the diplomat, familiar with the report, said.
The quarterly IAEA document was the first that included developments only since Rouhani took office on Aug. 3, prompting a diplomatic opening during which Iran and six major powers have made progress towards a possible nuclear deal.
STILL BELOW ISRAELI "RED LINE"
It also showed that Iran's stockpile of higher-grade enriched uranium had risen by about 5 percent to 196 kg (431 pounds) since August, largely due to a temporary halt in converting the material into reactor fuel.
But the amount of uranium gas enriched to a fissile concentration of 20 percent still remained below the roughly 250 kg (550 pounds) needed for a bomb if processed further - an amount that Israel has indicated is a "red line" that could trigger military action.
Iran's higher-grade enrichment is controversial as it is a relatively short technical step to ramp it up to the 90 percent required for making a nuclear warhead. Iran says it needs the material to fuel a medical research reactor.
Tehran denies Western and Israeli accusations that it is seeking nuclear weapons capability, saying it is enriching uranium only for peaceful energy. But its refusal so far to curb its nuclear programme, or open it up to unfettered IAEA inspections, has drawn tough sanctions that have severely damaged the OPEC giant's oil-dependent economy.
The IAEA said Iran had installed only four first-generation centrifuges - machines used to refine uranium - at its Natanz plant since August, making a total of 15,240. In the previous three-month period, May-August, it put in place an additional 1,800. Not all of the installed centrifuges are operating.
"Adding four means adding basically nothing. There is absolutely no technical reason. Clearly it is a choice not to increase the number of centrifuges," the senior diplomat said.
The report also said Iran had not installed any more advanced centrifuges, which can refine uranium must faster than the breakdown-prone IR-1 model and have also fanned concern in the West.
Rouhani succeeded hardliner Mahmoud Ahmadinejad in August, promising to try to settle the nuclear row and ease sanctions.
Negotiations between Iran and six powers - the United States, Britain, France, Germany, Russia and China - are scheduled to resume next week.
The powers want Iran to halt its most sensitive nuclear work and take other measures in exchange for limited sanctions relief as part of a confidence-building deal that would buy time for talks on a more far-reaching settlement. (Editing by Mark Heinrich and Robin Pomeroy)