Iran is expanding its nuclear programme and the ability of international inspectors to monitor its activities is deteriorating, according to a confidential report from the world's nuclear watchdog.

The White House described the latest International Atomic Energy Agency (IAEA) report as “a laundry list of Iran’s continued defiance of the international community" while diplomats expressed concern that Tehran's nuclear capability was now reaching the point of no return.

Nine months after the UN Security Council first ordered Iran to suspend its uranium enrichment, and one day before a second deadline to halt the programme, the IAEA admitted that Tehran was now closer to President Mahmoud Ahmadinejad's boast of "industrial scale" uranium enrichment than before.

Equally troubling for the IAEA was its diminishing power to monitor Iran's nuclear activities, with the agency's director, Mohammed ElBaradei admitting that inspectors have a “deteriorating" understanding of unexplored aspects of the programme.

“Iran has not agreed to any of the required transparency measures, which are essential for the clarification of certain aspects of the scope and nature of its nuclear programme,” said the four-page confidential report, which was swiftly leaked to news agencies.

“Iran has not suspended its enrichment-related activities. Iran has continued with the operation of its pilot fuel enrichment plant and with construction of its (planned underground industrial) enrichment plant."

The report will add further pressure to the UN Security Council to toughen the sanctions it has already ordered against Iran, which include limits on the movement of its nuclear scientists and a ban on financial investment in non-development projects in the country. A third UN resolution is expected in the coming days.

Nicholas Sarkozy, the new French President, has already suggested that he will support stronger measures against Tehran: “I for my part think one should not hesitate to toughen the sanctions,” he told the German monthly magazine Cicero.

But there are fears that Iran's uranium enrichment capacities -- it is now overcome technical problems to run more than 1,300 centrifuges at its main Natanz plant -- have changed the diplomatic landscape, meaning that some negotiators believe total suspension of the programme is now unrealistic.

Dr ElBaradei angered the Bush Administration earlier this month by telling The New York Times that the UN's demands for suspension appeared to have been "overtaken by events" and that it was arguable that Tehran should be allowed to retain some enrichment activities.

"We believe they pretty much have the knowledge about how to enrich,'' he told the newspaper. ''From now on, it is simply a question of perfecting that knowledge. People will not like to hear it, but that's a fact.''

The US reiterated its stance today, with Nicholas Burns, the Under Secretary of State, who is leading the America's Iran strategy saying: “We are not going to agree to accept limited enrichment, to accept that 1,300 centrifuges can continue spinning at their plant at Natanz."

Despite its recent advances, Iran is still believed to be some way off from producing weapons grade nuclear material. Right now its centrifuges are believed to be capable of producing 5 per cent enriched uranium -- sufficient for the peaceful purposes that Iran insists it is working towards -- but far from the 90 per cent level needed to make a bomb.

To make one bomb's worth of material, Iran would need to run around 3,000 centrifuges -- more than twice the current number but a scale thought to be achievable within months -- for a year. It would then face the considerable challenge of enriching the fuel further and mounting it on a serviceable weapon. Analysts believe that to achieve the later stages of enrichment Iran would have to expel the UN's weapon's inspectors, as North Korea did in 2002.

Today's report did nothing to reduce tensions in the Gulf today, already heavily strained by persistent US accusations of clandestine Iranian activity in Iraq. The US Navy mounted a massive military exercise off the coast of Iran today, involving 17,000 personnel in one of the largest concentrations of force in the region since the 2003 invasion. Oil prices climbed towards $70 on world markets on the news.

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