TEHRAN - Iran believes a nuclear fuel exchange with the West is still possible, state television said on Wednesday, a day after the Islamic Republic's expansion of uranium enrichment drew a U.S. warning of more sanctions soon.

The deal is still on the table, Ali Akbar Salehi, head of Iran's Atomic Energy Organisation, said on English-language Press TV.

But he appeared to reiterate Iran's demand for a simultaneous fuel swap on its soil -- a likely non-starter for Western powers who want Tehran to send most of its low-enriched uranium abroad before it gets higher-grade material in return.

Salehi said Iran's uranium could be sealed and under the custody of the U.N.'s International Atomic Energy Agency (IAEA) in the country, until it receives the fuel it needs for a medical research reactor.

U.S. President Barack Obama said on Tuesday the international community was moving fairly quickly toward imposing broader sanctions on Iran, after Tehran said it had started making uranium enriched to 20 percent.

Obama said Iran's refusal to accept a U.N.-brokered atomic fuel swap agreement suggested it was intent on trying to build nuclear weapons, despite its insistence its atomic activities were only for the peaceful generation of electricity.

Iran decided to step up enrichment after a failure to agree terms for the exchange, under which it would have sent the bulk of its uranium abroad in return for 20-percent-pure fuel rods for a Tehran reactor producing medical isotopes.

Such an exchange would prevent Iran from retaining enough of the material for a nuclear weapon, if it were refined to 90 percent. Iran has until now limited its enrichment to 3.5 percent.

MEDICAL CARE

Salehi said Iran would halt production of 20 percent fuel if it received it from abroad instead.

But he made clear Tehran was not backing down on its demand for a simultaneous exchange, a condition unlikely to be accepted by the major powers involved in efforts to find a diplomatic solution to the long-running dispute.

The uranium can be under the custody of the agency (IAEA) in Iran and it could be sealed ... until the time we receive the 20 percent enriched fuel from outside, Salehi said.

If they come forward and supply the fuel then we will stop this process of 20 percent enrichment, he added.

Press TV, Iran's English-language satellite television, quoted Salehi as saying Iran had decided to produce higher-grade uranium because Western nations refused to supply the fuel Iran needs for its medical reactor.

It said the reactor produces isotopes crucial for life saving medical care to more than 850,000 Iranian patients.

Centrifuges would need to be recalibrated for 20 percent production -- preparatory work that would normally take a month or two. A diplomat close to the IAEA said inspectors had noticed no such preparations before Monday.

Although a bomb requires about 90 percent purity, getting to 20 percent is a big step because low-level enrichment is the most time-consuming and difficult stage of the process.
Possible targets for any new sanctions include Iran's central bank, the Revolutionary Guards, who Western powers say are key to Iran's nuclear program, shipping firms and its energy sector, Western diplomats say.

(Editing by Jon Boyle)

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