Annan spoke as the so-called EU-3 -- Britain, France and Germany -- proposed a resolution at the Vienna-based International Atomic Energy Agency calling on Iran to stop nuclear fuel work that has raised fears Tehran intends to make atomic weapons.

"I believe that the best way to break the impasse is to continue the discussions" between Iran and the EU-3, the UN chief said after a luncheon with Japan's UN envoy Kenzo Oshima, the president of the UN Security Council for August.

"I have indications from both sides that they are prepared to continue their search for a solution," Annan added. "I hope that all sides will desist from any action that would lead to further escalation and continue the process at the table."

Commenting on Iran's decision to break seals placed by IAEA inspectors on the uranium conversion plant in Isfahan, allowing the plant to return to full capacity after a nine-month shutdown, Annan said: "Obviously this was not in conformity with the Paris agreement as endorsed by the atomic agency."

Under a Paris deal reached with the EU-3 in Paris last November, Iran had agreed to suspend its program of uranium enrichment. Tehran says the programme is for civilian purposes.

The IAEA's 35-nation board of governors was to meet Thursday at 3:00 pm (1300 GMT) in Vienna to consider the EU-3 resolution, which does not call for Iran to be taken to the UN Security Council for possible sanctions.

The resolution, which has been opposed by non-aligned states on the UN watchdog's board, "urges Iran to re-establish full suspension of all enrichment-related activities including the production of feed material, including through tests of production at the Uranium Conversion Facility" in Isfahan, according to a copy of the text obtained by AFP.

The EU and the United States have expressed serious concern about Iran's resumption of uranium conversion and its angry rejection of economic and security incentives offered by the EU-3 to persuade it not to develop nuclear weapons.

The United States charges that Iran is using its civilian nuclear program as a cover to develop atomic weapons.

But analysts have said Washington might find it hard to garner broad support for tough action against Iran, with Europe, Russia and China anxious to avoid jeopardizing their access to oil and lucrative trade.

China's UN ambassador Wang Guangya said Wednesday that it would not be "helpful" to haul Iran before the Security Council.

"It would not be helpful ... We all want a peaceful solution to the Iranian issue," he noted. "I think the best place is the efforts between the EU (European Union) and (the) Iranians or the IAEA."

"The council has too many things on the table. Why should we add more?," the Chinese envoy said. "I think the EU and Iran have not given up their efforts to work together for a solution ... This issue deserves a diplomatic solution."

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