(Reuters) - Major powers and Iran are signaling readiness to restart talks on a year-old plan to swap atom fuel, seen by the West as a possible way to build confidence for broader negotiations on the Islamic state's nuclear program.
But the two sides still differ on how such an exchange of Iranian low-enriched uranium (LEU) for further refined reactor fuel from abroad would take place. A tentative pact struck in October 2009 fell apart after Iran backed away from its terms.
Western diplomats say the idea could be revived if Iran also accepts wider-ranging talks they hope will lead to it agreeing to curb uranium enrichment which they fear has military aims.
They say any new accord must be updated to take into account Iran's growing LEU stockpile, material which can be used for bombs, and escalating enrichment activity since February.
Iran says it is open for fresh negotiations on the proposal but it rejects any toughening of the conditions.
Iran and the powers may meet for the first time in over a year this month -- time and venue are still to be decided -- and a fuel swap could be part of the discussions.
The following looks at the plan's main elements and how it fits into the broader nuclear row between Iran and the powers:
WHAT WAS THE IDEA BEHIND THE FUEL SWAP PLAN?
Under the initial agreement brokered by the U.N. nuclear watchdog between Iran, the United States, France and Russia last year, Iran would send 1,200 kg of its LEU abroad -- roughly the amount needed for a bomb if refined much more.
The material would first be enriched to 20 percent fissile purity by Russia and then turned into fuel assemblies by France before its return to Iran for use in a medical research reactor, which is running out of fuel provided by Argentina in the 1990s.
For the West, which suspects Iran is seeking to develop nuclear weapons, the proposal offered a way to restore a degree of trust in souring relations with Tehran and help in the search for a diplomatic solution to the eight-year nuclear dispute.
At the time, 1,200 kg of LEU represented about 75 percent of Iran's stockpile so it would also have ensured that it did not have enough left for a weapon, at least temporarily.
For Iran, it would have provided fuel for a reactor it says helps in treating hundreds of thousands of cancer patients.
President Mahmoud Ahmadinejad would also have been able to hail it as a foreign policy success, with Iran striking a deal with the powers without backing down over its enrichment work.
The U.S. envoy to the International Atomic Energy Agency (IAEA), Glyn Davies, last month described it as a "beautiful" agreement for Iran.
SO WHY DID THE DEAL COLLAPSE?
Analysts and diplomats believe it fell victim to Iran's internal power rivalries. Ahmadinejad's opponents, keen to deny him a diplomatic victory, said it would have forced Iran to part with the bulk of a strategic asset and a strong bargaining chip.
Iranian politicians raised new conditions for the swap, saying it must take place on Iranian soil and simultaneously.
This was unacceptable for the West as it would fail to remove potential bomb-material from Iran, which says its nuclear program is a peaceful drive to generate electricity.
Iran, Turkey and Brazil resurrected parts of the original plan in May in a bid to avert a tightening of sanctions on Tehran. Under this proposal, Iran would also send out 1.2 tonnes of LEU, this time to Turkey, in return for reactor fuel.
But the United States, Russia and France -- known as the Vienna Group -- voiced deep concerns about Iran's new offer.
Their main worries included Iran's growing LEU stockpile and its decision in February to escalate enrichment to 20 percent itself, a key step toward weapon-grade material.
Iran said it was forced to take this step to ensure reactor fuel itself but many analysts doubt its technical ability to convert the uranium into fuel rods, heightening suspicions.
The move failed to derail harsher U.N., U.S. and European sanctions on the major oil producer introduced since June.
COULD IT BE REVIVED?
Iran announced in July it was prepared to resume talks on the swap without preconditions, suggesting it may also halt 20 percent enrichment if it received the reactor fuel from abroad.
The six powers said they were also ready to discuss it again, but Western diplomats stress Iran must also agree to address their core concerns about its nuclear activities.
They fear that Iran may use any fuel swap talks as a way to distract attention from the West's main worry -- the uranium enrichment program -- and buy more time for these activities.
The New York Times in October reported intelligence analysts had concluded last year's deal was scuttled by Iran's supreme leader, Ayatollah Ali Khamenei, and that many officials therefore suspected that this latest effort would also fail.
Washington and its European allies are preparing a new swap offer to Iran, which the Times said would require Iran to send about 2,000 kg of LEU out of the country.
Iran's envoy to the IAEA said this idea lacked logic as Iran only needed reactor fuel for the equivalent of 1,200 kg.
"This (demand) could only be interpreted as sort of an excuse not to come to the negotiating table," he told Reuters.
Ivanka Barzashka of the Washington-based Federation of American Scientists the fuel deal was still worth pursuing and was a necessary condition for further engagement with Iran.
Mark Fitzpatrick, proliferation expert at the International Institute for Strategic Studies think-tank, said Iran would ideally agree to ship its LEU abroad more than once.
"If Iran's program is to be limited so that it doesn't have a quick (weapons) breakout capability, its ongoing production should either be limited or it should be persuaded to send the LEU out of the country on a regular basis," he said.
(Editing by Samia Nakhoul)