The United States expressed great concern over a confidential report by the UN nuclear watchdog in Vienna, which said Iran will resume large-scale production of material to enrich uranium, a process that can lead to nuclear weapons.

"We view with great concern the IAEA report that Iran is about to convert 37 tons of 'yellowcake' uranium into uranium hexafluoride gas, as well as Iran's recent announcement that it intends to test its gas centrifuges," John Bolton, undersecretary of state for arms control and international security said in Washington.

Iran however greeted the IAEA report as a positive step toward clearing up the country's file and demonstrating the peaceful character of the program.

"The more time has passed, the clearer it has become that our nuclear programme and activities are peaceful and do not contravene international rules," foreign ministry spokesman Hamid Reza Assefi said.

The Iranian move appears to mark a further step away from its commitments to suspend as a confidence-building measure the enrichment process that is crucial to making what can be the explosive core of an atomic bomb.

A senior diplomat close to the International Atomic Energy Agency said the upcoming production of the uranium hexafluoride would produce a "significant amount" of the gas, an amount that would apparently be enough to produce enough enriched uranium that could produce at least one if not several atom bombs.

Iran had pledged to Britain, France and Germany last October to suspend uranium enrichment, even though the nuclear Non-Proliferation Treaty allows it, in order to show the world community that its atomic intentions were strictly peaceful.

Iran then in February told the three European countries that it would voluntarily suspend the assembly and testing of centrifuges, the machine used to enrich uranium.

But in June, Iran said it would resume assembling and testing centrifuges since the so-called Euro-3 had failed to come through on a promise to get the IAEA to stop investigating Iran's nuclear program.

Wednesday's IAEA report obtained by AFP said the Iranians had taken off seals the agency had placed to monitor centrifuge manufacture and use at crucial sites.

Bolton said this and the uranium conversion were "further strong evidence of the compelling need to take Iran's nuclear program to the Security Council, Bolton said.

The report said it was "plausible" that Tehran was telling the truth in claiming uranium contamination found by IAEA inspectors had come from imported equipment and not because Iranian authorities were making material for an atomic bomb.

It also said that the IAEA's research into Iran's laser enrichment and uranium conversion activities had confirmed Tehran's reporting on these issues, and that these activities would now only be subject to routine monitoring.

An IAEA diplomat said: "I don't see how the United States can claim to take the issue to the Security Council (for possible sanctions against Iran)" based on a report the diplomat called "prudently positive for Iran."

But the report made clear that while Iran has helped the IAEA clarify certain key issues, the investigation would continue.

The report said a key unresolved issue was why Iran had done no work on sophisticated P2 centrifuges for seven years after acquiring design drawings for the machines in 1995.

"The reasons given by Iran for the apparent gap between 1995 and 2002 do not provide sufficient assurance that there were no related activities carried out during that period," the report said.

The agency also wants to find out why plutonium made by Iran may be in fact more recently manufactured than the 12-16 years of age Tehran claims.

"This implies that plutonium separation activities were carried out more recently than has been declared," a senior diplomat close to the IAEA said.

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