Outlook for nuclear "package diplomacy" on Iran gloomy

TEHRAN (Reuters) - Reports are being issued, offers are on the table, sanctions in the air. Two years after world powers first offered Iran incentives to forego uranium enrichment, Tehran is still calling the shots.

In what Iranian state media dub "package diplomacy", the Islamic Republic and six world powers propose rival plans to end a stalemate over Iran's atomic ambitions. Both, like those that went before, seem destined for the shredder of history if Iran continues uranium enrichment and the West demands its cessation.

"I do feel that everyone diplomatically is treading water," said Ali Ansari of the University of St Andrews in Scotland.

The shadow dance between the West and Iran is mirrored in domestic rivalries between hawks and doves in Tehran and differences between the powers over what sanctions can achieve.

Washington's exasperation is scarcely concealed, its pronouncements tending often to the bellicose, while China and Russia, closer trading partners of Iran, are more restrained.

The diplomacy comes before this month's report by U.N. watchdog, the International Atomic Energy Agency (IAEA), and after talks with Tehran about allegations it conducted covert studies into designing a nuclear warhead. Iran denies this and the broader Western allegation it is pursuing nuclear arms.

The five permanent members of the U.N. Security Council -- the United States, Britain, France, China and Russia -- plus Germany, known as the 5+1, are offering incentives to coax Iran to halt uranium enrichment, their main precondition for talks.

With the United States embroiled in election debates and battling violence in Iraq, Iran appears confident any refusal to rein in nuclear work will not bring serious repercussions -- even though Washington has not ruled out military action.

"If they are convinced that the West is not in a position to take serious action against them ... I don't think they will accept any incentives," said one Iranian analyst in Tehran.

NEW LOGIC

Details of the latest 5+1 overture have not been released, but Iran rejected the 2006 version of trade, nuclear and other incentives which was the basis for the new initiative.

Privately, some Western diplomats admit that after three U.N. sanctions resolutions since 2006 -- all demanding Iran halt enrichment and all ignored -- the powers must think again.

"The next resolution should probably be in a new logic -- stronger and really going into serious sanctions. The Iranians think it is never go to work," said one Western diplomat.

The last three resolutions were relatively limited in scope -- including targeting individuals, some firms with military links and several banks. Although analysts say they have had some economic impact, Iran brushes them off and says its windfall oil earnings are cushioning the blow.

Any "new logic" may hinge on the winner of this year's U.S. presidential race, where views on handling Iran differ starkly. The two countries have not had diplomatic ties since 1980.

U.S. Republican presidential candidate John McCain this week accused Democratic front-runner Barack Obama of underestimating the threat posed by Iran and ridiculed his pledge to meet Iranian hardline President Mahmoud Ahmadinejad if elected.

Western diplomats have been unimpressed by Iran's package, including proposals for an international consortium to enrich uranium in Iran. But an Iranian official said the aim was to get talks rolling not propose a specific solution.

"We can mix these two packages and make it a basis for talks. But only if they (the 5+1) ignore their precondition (on halting nuclear work)," said the official, who asked not to be identified because of the sensitivity of the subject.

TIME PASSES

The Iranian official said one challenge of putting together Tehran's proposal was winning over those in the Iranian political establishment opposed to opening dialogue.

He mentioned no names, but Ahmadinejad said in March Iran would only hold talks with the IAEA in future, ruling out discussions with world powers. That stance was later softened.

"There is a group of wise people among high-ranking officials ... those who think the country should be ... rebuilt and therefore they want to resume talks," he said.

He also made clear Supreme Leader Ayatollah Ali Khamenei, Iran's top authority who tends to be make fewer public pronouncements than his more garrulous president, was closely involved in the process. Ultimately, policy lies in his hands.

Iran has yet to be given the 5+1's proposals and has still not set a date to receive them. For some Western diplomats that indicates Tehran is using delaying tactics to press ahead with atomic work. And some say time, for now, is on Iran's side.

"There are a whole range of issues where they feel time is working for them and, to be honest, they may be right," said the Western diplomat, although he said Iran's isolation was hurting.

Tehran, too, is suspicious of Western intentions. It fears Washington wants to use the 5+1 initiative to win over waverers in Russia and China for its push to impose sterner U.N. steps.

"We think some countries want to create tension because it is in their interest. They will tell Russia and China, 'You see, we offered them another package, but they rejected it,' then they will go ahead with harsher measures," said the official.

(Writing by Edmund Blair, editing by Ralph Boulton)