When we say that we don't build nuclear bombs, it means that we won't do that because we don't believe in having it, he said. The Iranian nation is brave enough that if one day we wanted to build nuclear bombs we would announce it publicly without being afraid of you.

Right now in Natanz (enrichment complex) we have the capability to enrich to more than 20 percent and (also) to more than 80 percent, but because we don't need to, we won't do so.

Ahmadinejad also said Iran had produced its first batch of 20 percent-enriched atomic fuel, two days after it announced the start of the project.

Iran denies Western accusations that its nuclear energy program has military goals, saying it only seeks to generate electricity so that it can export more of its oil and gas.

MODEST HIGHER-SCALE ENRICHMENT

Iran opted to escalate enrichment after the collapse of efforts to iron out a fuel swap deal with the West, under which it would have sent much of its low-enriched uranium abroad in return for 20-percent-pure fuel rods for a medical reactor.

Tehran says its shift into 20 percent enrichment is solely to replenish the medical isotope-producing reactor's fuel stock, which is due to run out of such fuel later this year.

But Iran lacks the technical means to convert 20 percent fuel into the special fuel assemblies for the reactor, raising skepticism about its motivations for higher-scale enrichment.

The main technical challenge in enriching uranium is to reach a level of 3.5 percent -- which Iran has already done. After that scaling up to 20, or 80 percent, is relatively easy.

However, Iran would then still have to master technology to convert high-enriched uranium into a deliverable nuclear weapon. U.S. National Intelligence chief Dennis Blair said last year Iran would not be capable of weaponizing enrichment before 2013.

Ahmadinejad said Iran would in the near future treble output of 20 percent fuel. Why do they (West) think by producing 20 percent fuel a major event has happened? Right now at Natanz we have the capability to enrich uranium to much higher levels.

Iranian officials say Tehran remains prepared to exchange fuel, but under conditions which the West has rejected.

For world powers and the U.N. nuclear watchdog, the swap's attraction lies in preventing Iran from retaining enough of the material for a nuclear weapon, if it were refined to 90 percent.

Iran has insisted on simultaneous exchanges of small amounts of low-enriched uranium on its own soil, which would allow it to keep enough for use in a weapon, if it so decided.

Come and give us fuel without preconditions. We are ready to buy fuel from an country that provides us with it, we are even ready to buy fuel from America, Ahmadinejad said.

(Additional reporting by Parisa Hafezi and Hashem Kalantari; writing by Mark Heinrich and Fredrik Dahl; editing by Myra MacDonald)