TEHRAN - Iran said it will start making higher-grade reactor fuel on Tuesday and will add 10 uranium enrichment plants over the next year in a nuclear expansion sure to stoke tensions with the West.

The statement by Iran's Atomic Energy Organization head Ali Akbar Salehi followed orders from President Mahmoud Ahmadinejad on Sunday for work to begin on producing atomic fuel for a Tehran research reactor.

It may increase Western suspicions that Iran's nuclear program is aimed at making bombs, a charge Tehran denies.

Iran informed the U.N. nuclear agency in a letter on Monday about its decision to enrich uranium at its Natanz plant to a level of 20 percent for use in the reactor producing medical isotopes, compared with the 3.5 percent it now makes.

Today we handed over the letter, Iran's envoy to the International Atomic Energy Agency (IAEA), Ali Asghar Soltanieh, told Iran's Arabic-language al Alam state television.

The letter said 20 percent enrichment would start on Tuesday with the aim of later converting it into fuel and it invited U.N. inspectors to monitor the process, Soltanieh told Reuters.

Salehi earlier told al Alam: Iran will set up 10 uranium enrichment centres next year. The Iranian year starts in March.

Iran mooted such a plan late last year but gave no time frame.

The announcements raise the stakes in Iran's dispute with the West, although experts doubt Tehran has the technical ability to launch 10 new plants so soon and believe it is finding it harder to obtain crucial components due to U.N. sanctions.

Analysts say it may be a negotiating tactic to prod the West into accepting Iranian terms for a nuclear fuel swap.

But it could backfire if it only serves to make Western powers determined to push for more sanctions against Iran, the world's fifth-largest oil exporter, over its refusal to suspend enrichment.

TURMOIL

Ahmadinejad said Iran remained open to a proposed nuclear fuel exchange with world powers, which they hope would minimize the risk of Iran developing atomic bombs. Iran says it wants only to generate electricity from low-level enrichment.

Salehi suggested production of the material would be halted if Iran could import 20 percent uranium, the degree of purity required for conversion into special fuel needed to run a Tehran nuclear medicine reactor, Iran's stated goal for the move.

Tehran has voiced readiness to send low-enriched uranium (LEU) abroad in a swap for fuel for the reactor, due to run out of it later this year. Such a deal would remove the bulk of potential nuclear bomb material Iran has stockpiled.

But amendments Iran has demanded to the U.N.-drafted plan have been rejected by the United States, France and Russia because they would allow Iran to keep much of its LEU reserve.

Iran would halt its enrichment process for the Tehran research reactor any time it receives the necessary fuel for it, Salehi said.

Germany said on Monday Iran's announced intention to crank up nuclear work showed it was not cooperating with the IAEA, which has called for a nuclear suspension and more inspections.

Ahmadinejad's contradictory signals over the last week -- first expressing readiness to send LEU abroad and then announcing that Iran would start producing 20 percent fuel itself -- also could be a sign of Iran's political turmoil.

Analysts believe Ahmadinejad may want to secure a swap deal with the international community to boost his legitimacy after a disputed election last year but is hampered by political rivals who oppose any LEU export as a threat to national security.

PUSHING DIRT AROUND

Opposition supporters are expected to try to revive their protests over the June election on Thursday, when Iran marks the anniversary of the 1979 Islamic revolution, despite repeated warning of a firm response by the authorities.

The Iranian nation will show on (February 11) how it will punch the faces of all the world's arrogants -- America, Britain and Zionists -- with its unity, Supreme Leader Ayatollah Ali Khamenei said on Monday, state television reported.

Iran's move to make 20 percent fuel itself may heighten suspicions that its real aim is higher-enriched uranium for atom bombs, since only France and Argentina -- not Iran -- are known to have the technology to yield fuel for medical isotopes.

A senior diplomat close to the IAEA said enrichment to 20 percent was legal under Iran's non-proliferation accord with the agency.

Natanz would need less than a few months to start making the 20 percent enriched uranium, (although) Iran will face significant technical hurdles in manufacturing it, said David Albright, head of the Institute for Science and International Security.

The bigger question was whether Iran planned to make a small amount of enriched uranium for its research reactor or was trying to convert most of its 3.5 percent stock of enriched uranium into 20 percent material.

By doing so, it would be going most of the rest of the way to weapon-grade uranium, Albright told Reuters.

Mark Fitzpatrick, a proliferation expert at London's International Institute for Strategic Studies, said the plan for 10 more enrichment sites in short order was a farcical bluff.

It is hard-pressed today even to keep the centrifuges installed at Natanz running smoothly, Fitzpatrick told Reuters.

(Additional reporting by Parisa Hafezi, Reza Derakhshi and Hashem Kalantari in Tehran and Madeline Chambers and Paul Carrel in Berlin; Writing by Mark Heinrich; Editing by Michael Roddy)

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