UPDATE 2-Iran eliminates sensitive stockpile under interim nuclear deal-IAEA
* Iran has complied with six-month nuclear deal - IAEA report
* Paves way for release of new tranche of frozen funds
* But Iran, world powers still far apart over uranium enrichment
* Talks on a comprehensive accord extended until late November (Adds detail from IAEA report, context, U.S. official, payments)
By Fredrik Dahl
VIENNA, July 20 (Reuters) - Iran has moved to eliminate its most sensitive stockpile of enriched uranium gas under an interim nuclear deal reached with six world powers last year, according to a monthly update by the U.N. nuclear watchdog obtained by Reuters on Sunday.
The report by the International Atomic Energy Agency (IAEA) showed that Iran had met the terms of the six-month agreement, under which it limited its atomic activities in exchange for some easing of sanctions that are crippling its economy.
The preliminary accord had been due to expire on Sunday but will be extended with some adjustments, after Iran and the six powers failed during negotiations in Vienna to meet a self-imposed July 20 deadline for a long-term deal to end the decade-old nuclear standoff and agreed to continue talking.
The four-month extension underlines the difficulties negotiators face in settling the dispute permanently even if Iran has met its commitments under the initial agreement, as Sunday's IAEA report suggests.
The six powers - the United States, France, China, Russia, Germany and Britain - want Iran to significantly reduce its uranium enrichment programme to make sure it cannot produce nuclear bombs. Iran says it is peaceful and wants sanctions on the oil-dependent economy to be lifted as soon as possible.
After years of rising tension between Iran and the West and fears of a new Middle East war, last year's election of a pragmatist, Hassan Rouhani, as Iran's president led to a thaw in ties that resulted in the current nuclear negotiations.
Under the accord reached in Geneva on Nov. 24, designed to buy time for talks on a comprehensive solution, Iran halted the most controversial aspect of its nuclear programme - enrichment of uranium gas to a fissile concentration of 20 percent.
It also undertook to dilute or convert to oxide its remaining stockpile of the material - nearly 210 kg - during the half-year period, which Sunday's IAEA report showed it had now completed. That stockpile was closely watched by the West as the level of enrichment represented a relatively short technical step away from that required for nuclear weapons.
Iran says it is only refining uranium to fuel nuclear power plants or research reactors, not to develop a nuclear weapons capability as the West suspects.
INTERIM DEAL A "SUCCESS" - U.S.
The IAEA update also showed that Iran had started up a long-delayed facility to convert some of its lower-grade enriched uranium gas into oxide and had fed about 1,500 kg of the material into the conversion process, as agreed in November.
Western experts say it would take more time to make a bomb from uranium oxide than from gas, lowering any risk of a quick breakout for a nuclear weapon.
As the IAEA confirmed in a series of monthly updates since the agreement took effect on Jan. 20 that Iran lived up to its part of the deal, the Islamic Republic has gradually gained access to some of its frozen cash held abroad.
After Sunday's IAEA report, it looked set to receive a last instalment of $550 million out of a total of $4.2 billion over the half-year period. During the extra four-month period it will receive an additional $2.8 billion for continuing to comply with the interim deal and for undertaking some new measures, including turning 20 percent uranium oxide into nuclear fuel.
U.S. officials say Iran still has more than $100 billion in foreign assets which it has problems accessing due to financial sanctions imposed in recent years over its nuclear programme.
A U.S. official said on Saturday that last year's agreement had been "a success in halting the progress of the Iranian programme and rolling it back in exchange for a relatively modest relief that has been provided over the six months".
But it remains unclear whether the extension of the talks until late November will yield a final settlement on wider curbs to Iran's nuclear activities in exchange for a gradual end to sanctions, experts and diplomats say.
"There continue to be important gaps ... between the parties," said the senior U.S. official, speaking on Saturday after the extension was agreed with Iran. (Editing by Erica Billingham)