UPDATE 2-Iran, world powers deadlocked at nuclear talks
* Talks in final day with sides far apart
* Markets nervous over oil price and fears of war (Adds analyst quotes, updates talks)
By Yeganeh Torbati and Thomas Grove
MOSCOW, June 19 (Reuters) - Iran and six world powers blamed each other for deadlock at talks on Tehran's nuclear programme on Tuesday as negotiators struggled for a breakthrough to reduce the risk of a new Middle East war.
Late on the second and final day of talks in Moscow, diplomats said negotiators were still far from agreement on Iranian work which the United States, China, Russia, Germany, France and Britain fear may be aimed at building nuclear arms.
The six powers want Tehran to stop enriching uranium to levels that bring it close to acquiring weapons-grade material, but Iran has demanded relief from economic sanctions and an acknowledgement that it has the right to enrich uranium.
If talks collapse, anxiety could grow on financial markets over the danger of higher oil prices and conflict in the Middle East because Israel has threatened to attack Iranian nuclear sites if diplomacy fails to stop Tehran getting the bomb.
"We did not come to Moscow only for discussions. We came to Moscow for a resolution. But we believe the opposite side is not ready to reach a resolution," an Iranian diplomat said.
Iran says its programme has only non-military purposes but the so-called P5+1, grouping the five permanent members of the U.N. Security Council plus Germany - say Tehran must do more to prove this and permit United Nations inspections of its work.
"Our key requirements are: stop, shut and ship," said a Western diplomat who was present at the talks.
He was referring to demands for Iran to stop producing higher-grade uranium, ship any stockpile out of the country and close down an underground enrichment facility, Fordow.
Diplomats said efforts were being made to find enough common ground to press on with talks in Moscow, and to ensure negotiations continue elsewhere in the future.
"There are a lot of ideas in play. It's part of the ebb and flow of negotiations," said a Western envoy.
"Contacts are still ongoing to seek a way forward," another Western diplomat said after hours of talks on Tuesday.
Deputy Foreign Minister Sergei Ryabkov, who leads Russia's delegation at the talks, said as talks resumed on Tuesday that diplomacy could still work even though a European Union spokesman had described day one as "intense and tough".
"I don't think anything will break down. We will have a reasonable outcome," Ryabkov said.
But other diplomats were less optimistic and hopes receded as the day wore on with no sign of progress.
The Moscow talks follow two rounds of negotiations since diplomacy resumed in April after a 15-month hiatus during which the West cranked up sanctions pressure and Israel repeated its threat to bomb Iranian nuclear sites if diplomacy failed.
A series of United Nations Security Council resolutions since 2006 have demanded Iran suspend all its enrichment-related activities. Tehran denies planning to build nuclear weapons and says its programme is purely for civilian purposes.
Rather than halt enrichment - a process which refines uranium for use as fuel or, if done to a much higher level, nuclear bomb material - Iran has increased its activities.
Experts had said even before the talks began that a breakthrough was unlikely.
The P5+1 are wary of making concessions that would let Tehran draw out the talks and gain the time needed to develop nuclear weapons capability. Iran's negotiators want a deal that they can sell at home as a triumph.
"No diplomatic deal to solve the Iranian nuclear standoff will be possible if it does not allow Tehran's leadership to proclaim some measure of victory, most probably a recognition of Iran's right to enrich uranium for civilian reactors," said George Perkovich of the Carnegie Endowment for International Peace, a think-tank.
An EU embargo on Iranian oil takes full effect on July 1 and new U.S. financial sanctions some days before that. Iran's crude oil exports have fallen by some 40 percent this year, according to the International Energy Agency.
Increasing the pressure, Israel - widely believed to be the only nuclear-armed country in the Middle East - has said time is running out before Iran's nuclear facilities, some of which are deep underground, become invulnerable to air strikes.
In early 2010, Iran announced it had started enriching uranium to 20 percent purity, a level much higher than what is needed for power generation and seen by some experts as a dangerous step towards being able to make bomb material.
The six powers want a substantive response to their offer of fuel supplies for Tehran's research reactor and relief in sanctions on the sale of commercial aircraft parts to Iran.
Diplomats said the powers had also suggested, at a meeting in Baghdad in May, that they suspend introducing new sanctions at the U.N. level while diplomacy is taking place, but only if their demands on high-grade uranium are met.
After meeting at the G20 summit in Mexico on Monday, Russian President Vladimir Putin and U.S. President Barack Obama again called for Tehran to prove its nuclear programme is not aimed at developing weapons. Obama said they had agreed there was still time for a diplomatic solution to the standoff. (Additional reporting by Fredrik Dahl in Vienna; Writing by Justyna Pawlak; Editing by Timothy Heritage and Andrew Roche)