World powers are making progress in narrowing their differences on how to respond to a U.N. watchdog report that aired intelligence suggesting Iran has worked on designing a nuclear weapon, Western diplomats said on Wednesday.

They said officials from the six big powers -- the United States, Russia, China, France, Germany and Britain -- were in intense negotiations on drafting a resolution on Iran for a November 17-18 board meeting of the International Atomic Energy Agency.

But they said it was still uncertain whether a text that all six could agree on would be ready in time for the two-day meeting of the 35-nation IAEA board, in view of remaining divisions between the Western states and Russia and China.

I'm certainly more optimistic than I was yesterday. Progress is being made, one diplomat said.

Another Western diplomat estimated there was more than an even chance of an agreement.

There has been concern that if the powers cannot close ranks on isolating Iran to nudge it into serious negotiations, then Israel -- which feels endangered by the nuclear aspirations of its arch-enemy -- will attack it.

The IAEA report, which lent independent weight to Western allegations, laid bare of a trove of intelligence suggesting it is seeking the capability to weaponise nuclear material.

The unprecedented document exposed divisions among the big powers, with Russia criticising the report as politicised and Western states seizing on it to try and ratchet up pressure on Tehran in the form of harsher economic sanctions.

Western countries faced a dilemma ahead of this week's IAEA governors meeting: press for a strongly-worded resolution and risk Russian and Chinese opposition, or accept a weaker text in order to preserve big power unity.

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Any board resolution would likely stop short of taking concrete action -- such as referring Iran once again to the United Nations Security Council -- in view of Russian and Chinese reluctance, diplomats said.

It is expected to express concern about Iran's nuclear work and call on the country to address issues raised in last week's report by the IAEA, the Vienna-based U.N. nuclear body, one of the Western diplomats said.

I think we will get to a point where it (the text) is manageable to all of us, the diplomat said. Another Western envoy spoke of good chances an agreement would be reached.

The main goal of such a resolution would be to demonstrate a big power common front and warn Iran about the need to engage in good-faith talks about its nuclear programme.

Iran, which says it is enriching uranium only for fuel for power plants and not nuclear weapons, condemned the IAEA's findings as unbalanced and politically motivated but has yet to offer detailed answers to the allegations.

Russia, which has significant trade ties with Iran, has been softer on Tehran than the United States and the European Union, and has worked with China to water down previous U.N. Security Council sanctions. China is a big importer of Iranian oil.

Moscow has said the IAEA report contained no new evidence and was being used to undercut efforts to reach a diplomatic solution to the long-running nuclear dispute with Iran.

The United States and its allies have made clear their intention to tighten sanctions on Iran after the IAEA report.

Despite such differences, U.S. President Barack Obama said on Saturday he and Russian President Dmitry Medvedev reaffirmed our intention to work and shape a common response so we can move Iran to follow its international obligations when it comes to its nuclear programme.

(Editing by Mark Heinrich)