VIENNA (Reuters) - A U.N. watchdog report due on Thursday is likely to confirm Iran has expanded rather than halted its nuclear fuel programme, exposing Tehran to possible wider sanctions over fears it secretly wants to make atom bombs.
As a 60-day grace period for it to stop enriching uranium expired on Wednesday, Iran offered to guarantee it was not pursuing nuclear weapons, but only as part of negotiations.
It has refused to shelve the programme as a precondition for talks and says it is enriching uranium only to make electricity.
"The Iranian nation defends its rights. The nuclear right is demanded by all Iranians and no one in the world can deprive the Iranian nation of its right," President Mahmoud Ahmadinejad said in a speech in northwest Iran, ISNA news agency reported.
Its rejection of terms set by six world powers for talks on trade incentives means the U.N. Security Council may soon weigh broadening the limited sanctions -- a ban on transfers of atomic technology and know-how to Iran -- it imposed in December.
Additional penalties might include a travel ban on senior Iranian officials and restrictions on non-nuclear business.
In Berlin, U.S. Secretary of State Condoleezza Rice urged Iran to suspend uranium enrichment to obtain talks, and said its isolation would increase if it did not change course.
"We confirmed that we will use our available channels and the Security Council to try and achieve that goal (suspension)," she said after a breakfast meeting with the foreign ministers of Germany and Russia and EU foreign policy chief Javier Solana.
But analysts say harsher sanctions face serious obstacles, as Russia, China and some EU powers prefer further dialogue with Iran to Washington's thrust to isolate and punish it.
The United States has built up aircraft carrier strike forces in the Gulf as a warning to Iran. But Britain, its closest ally, said on Thursday no attack was being planned and a diplomatic solution was the only sensible strategy.
NO PLAN TO ATTACK IRAN
"Iran is not Iraq. There is, as far as I know, no planning going on to make an attack on Iran and people are pursuing a diplomatic and political solution for a very good reason ... that it is the only solution that anyone can think of as viable and sensible," Prime Minister Tony Blair said on BBC radio.
The Security Council commissioned the International Atomic Energy Agency (IAEA) to report on whether Iran had heeded the deadline for it to mothball enrichment-related activity.
Diplomatic leaks about Iran's efforts to shift from modest experimental enrichment towards "industrial-scale" output of atomic fuel made the IAEA verdict almost a foregone conclusion.
Barring an improbable turnaround by Iran, "I will have to report negatively," IAEA director Mohamed ElBaradei told Britain's Financial Times newspaper in an interview this week.
The IAEA report will confirm that Iran has begun installing the first batch of 3,000 centrifuge machines planned at its underground Natanz plant this year, the basis for "industrial-scale" enrichment involving some 54,000 machines.
ElBaradei told the Financial Times that at least one cascade, or fuel-cycle network, of 164 centrifuges was already set up. Diplomats monitoring inspectors' findings said at least two cascades had been erected.
Two diplomats said Iranian workers lowered into the plant a nine-tonne container of uranium hexafluoride gas to prepare to begin feeding centrifuges, which can enrich the material into fuel for power plants or, if refined to high levels, for bombs.
Iran says it wants several nuclear power plants to prepare for the day crude reserves run out and to maximise exports meanwhile. Its first atomic power plant is not yet finished.
The West fears Iran, which hid enrichment research from the IAEA for 18 years and has impeded investigations into whether its programme is wholly peaceful, is trying to make bombs under cover of a civilian nuclear energy programme.
But Iran remains three to 10 years away from having enough enriched uranium for the core of nuclear bombs -- if it wants them -- intelligence estimates and independent analysts say.