Iran said on Saturday a new report from the United Nations nuclear watchdog showed Tehran's nuclear program was peaceful, despite Western suspicions it is aimed at making atomic bombs.

Friday's report said Iran had significantly expanded uranium enrichment with almost 5,000 centrifuges now operating and this had made it harder for U.N. inspectors to keep track of the disputed nuclear activity.

The International Atomic Energy Agency (IAEA) report said Iran had increased its rate of production of low-enriched uranium (LEU), boosting its stockpile by 500 kg to 1,339 kg in the past six months.

Iran's improved efficiency in turning out potential nuclear fuel was sure to fan Western fears of the Islamic Republic nearing the ability to make atomic bombs, if it chose to do so.

But Ali Ashgar Soltanieh, Iran's ambassador to the IAEA, said the report made clear again there was no evidence of any diversion of nuclear materials or pursuit of military aims and also that the agency was able to carry out its supervisory work.

This is in fact a clear and categorical document in demonstration of the peaceful nature of Iran's nuclear activities, he said in remarks broadcast by state television.

We will not suspend our nuclear activities and we will not, at the same time, suspend our cooperation with the agency, Soltanieh said.

Tehran says its nuclear program is aimed at generating electricity and has repeatedly rejected Western demands to halt uranium enrichment, which can have both civilian and military purposes.

But Iran has stonewalled an IAEA investigation into alleged past research into bomb-making, calling U.S. intelligence about it forged, and continues to limit the scope of IAEA inspections.

The latest IAEA report highlighted the challenges facing U.S. President Barack Obama as he seeks to work toward reconciliation with Iran after three decades of mutual mistrust.

Obama has set a rough timetable for negotiating results with Iran, saying he wanted serious progress by the end of the year. He has underlined that any U.S. overtures will be accompanied by harsher sanctions if there is no cooperation.

This (IAEA) report will increase Washington's sense of urgency over the need to deal with this issue, said Cliff Kupchan of Eurasia, a risk consultancy.

Kupchan said it could also help conservative President Mahmoud Ahmadinejad in his bid for a second four-year term in a June 12 election, in which he faces a challenge from moderates seeking a detente in Tehran's international relations.

Voters ... are proud of Iran's technological accomplishments; the Ahmadinejad camp will probably trumpet the agency report with gusto, he said in an e-mailed commentary.

(Reporting by Hashem Kalantari; Writing by Fredrik Dahl; Editing by Dominic Evans and Jon Hemming)