ISTANBUL (Reuters) - Major powers will hold their first talks with Iran this week in more than a year, hoping Tehran will give enough ground on its nuclear program to extend negotiations and avert the threat of a Middle East war.
Israel has hinted at military action against Iran, arguing time is running out to stop it developing atomic arms; Iran says it could retaliate by closing a major oil shipping thoroughfare, aware that would push up crude prices and hit the world economy.
The six powers - the United States, France, Germany, China, Russia and Britain - will not lay out demands when the talks open in Istanbul on Saturday, a Western diplomat said, but will be looking for signs Iran is ready to make concessions.
"The onus is on them in this first meeting to demonstrate that they are serious about a negotiation over their nuclear program. If they are, we will get into detail on what that would look like," the diplomat added.
Iran - which will be represented by its chief nuclear negotiator Saeed Jalili - says it will put forward "new initiatives" in Istanbul but has given no details. Tehran says its nuclear program is purely peaceful.
The West hopes that tough sanctions on Iran's oil exports will persuade Tehran to take meaningful steps - possibly on ending higher levels of uranium enrichment.
But they will be wary of any Iranian attempt to buy time with "talks about talks" on resolving the decade-long dispute.
The discussions will be "a gauge as to whether Iran is indeed serious about dealing" with international concerns, a Western envoy said, adding that Tehran's track record did not "augur well".
The last time Iran and the powers - led by European Union foreign policy chief Catherine Ashton - sat down together in early 2011, they could not even agree an agenda.
"The clock is definitely ticking. This may be the last best chance for diplomacy," senior researcher Shannon Kile at the Stockholm International Peace Research Institute (SIPRI) said.
If diplomacy fails, "you could be looking at the possibility of conflict in the region," said Daniel Keohane of FRIDE, a European think-tank.
Iran has consistently ruled out suspending all enrichment, a process which can have both energy and weapons purposes. But it has hinted it may stop refining uranium to higher levels and diplomats and analysts expect this to be a focus of discussions.
Two years ago, Iran spurned U.N. demands to halt enrichment and ramped up processing to 20 percent fissile purity, a major step on any path to the 90 percent level required for nuclear explosions. The West responded with broad sanctions on Iranian banks and oil exports.
The country's 20 percent enrichment at an installation deep inside a mountain is "very high on our list of things where Iran would need to stop to begin convincing us about the peaceful nature of their program", a third Western diplomat said.
Iranian nuclear energy chief Fereydoun Abbasi-Davani said on Sunday Tehran might scale back this production - which compares with the up to 5 percent level suitable for fuelling nuclear power plants - once it has what it needs for medical isotopes.
"The 'enrich what we need' principle provides the Iranians with a face-saving solution for halting enrichment at 20 percent," said analyst Ali Vaez at the International Crisis Group think-tank.
But a U.S.-based think-tank, the Institute for Science and International Security (ISIS), noted that Abbasi-Davani had also talked about the need for 20 percent enriched uranium for a planned second research reactor it had not yet declared to the U.N. nuclear watchdog.
"Abbasi-Davani's offer to halt 20 percent enrichment at some point in the future should not be accepted and the (six powers) should reject anything less than an immediate freeze," ISIS said.
NO IRANIAN CHANGE OF HEART?
Russia and China last month joined the four Western powers in expressing "regret" at Iran's expansion of this higher-grade enrichment, most of which is now taking place at the underground site to protect it from possible Israeli or U.S. attack.
But Moscow and Beijing have made clear their opposition to any new U.N. measures and have criticized unilateral punitive steps by the United States and EU.
Israel says it fears Iran will soon have moved enough of its nuclear program underground to make it virtually impervious to a pre-emptive Israeli attack, creating what Defense Minister Ehud Barak recently referred to as a "zone of immunity".
If Iran limits its nuclear activity, which it says is to generate electricity and produce isotopes for cancer treatments, it would probably expect to be rewarded with an easing of sanctions.
"There is a need for both sides to meet each other half way, to show some flexibility," a senior diplomat from a non-Western country said, calling for "creative and innovative ideas".
Western punitive steps over Iran's refusal to back down have piled pressure on the economy, said Mohammed Shakeel, an independent analyst based in Dubai across the Gulf from Iran.
"The country's economy is showing strong signs of strain: real Gross Domestic Product is likely to contract over the next year or two as the mainstay of the economy - oil production - is expected to fall and export revenue declines," Shakeel said.
But there is no indication tougher sanctions have prompted a change of heart by Iran's top authority, clerical Supreme Leader Ayatollah Ali Khamenei, one of the Western diplomats said.
"We see no sign of it changing the strategic calculus of the supreme leader," he said.
On Thursday, Iranian President Mahmoud Ahmadinejad struck a defiant tone, saying the Islamic state would not surrender its nuclear rights "even under the most difficult pressure".
While the substance of Ahmadinejad's comments was not new - he has made similar statements many times before - the timing may be interpreted as a sign of Iranian unwillingness to negotiate transparent curbs on enrichment.
(Additional reporting by Arshad Mohammed in Washington and Adrian Croft in London; Editing by Mark Heinrich)