* Begin three-day talks in Vienna on lasting nuclear pact
* Powers want Iran nuclear curbs, Tehran an end to sanctions
* Substantial gaps remain but sides hope for deal by July 20
* U.S. official cautions against excessive optimism
(Updates with talks starting, Iranian, Israeli quotes)
By Louis Charbonneau and Justyna Pawlak
VIENNA, May 14 Six world powers and Iran
launched a decisive phase of diplomacy on Wednesday to begin
drafting a lasting accord that would curb Tehran's contested
nuclear activity in exchange for a phased end to sanctions that
have hobbled the Iranian economy.
After three months of floating expectations rather than
negotiating possible compromises, the sides now aim to devise a
package meant to end years of antagonism and curtail the risk of
a wider Middle East war with global repercussions.
Washington's decades-long estrangement from Iran could ease,
improving international stability, if a deal were done but U.S.
officials warned against unwarranted optimism given persisting,
critical differences between the sides.
In the next two months, the United States, Russia, China,
France, Britain and Germany will want Iran to agree to
dramatically cut back its uranium enrichment programme, which
they fear could lead to the making of atomic bombs, while Iran
wants them to eliminate sanctions against its oil-based economy.
Diplomats from both sides have said they want to resolve all
sticking points about issues such as Iran's capacity to enrich
uranium and the future of its nuclear facilities, as well as the
timeline of sanctions relief, by a July 20 deadline.
After that, an interim deal they struck last November
expires and its extension would probably complicate talks.
An accord in two months is far from assured, with Western
diplomats warning that divisions could prove insurmountable.
"Quite frankly, this is very, very difficult," a senior U.S.
official told reporters on the eve of the talks, speaking on
condition of anonymity.
"I would caution people that just because we will be
drafting it certainly does not mean an agreement is imminent or
that we are certain to eventually get to a resolution."
A spokesman for EU foreign policy chief Catherine Ashton,
who coordinates diplomacy with Iran on behalf of the six, said
negotiators held a "useful initial discussion" on Wednesday
morning and would hold coordination meetings later in the day.
"We are now hoping to move to a new phase of negotiations in
which we will start pulling together what the outline of an
agreement could be. All sides are highly committed."
ISRAELI THREAT TO HIT IRAN
Looming in the background of the talks have been threats by
Israel, widely believed to have the Middle East's only nuclear
weaponry but which sees Iran as a existential threat, to attack
Iranian nuclear installations if it deems diplomacy ultimately
futile in containing Tehran's atomic abilities and potential.
U.S. President Barack Obama has not ruled the last-ditch
option of military action either.
Broadly, the six powers want to ensure the Iranian programme
is curtailed enough so that it would take Iran a long time to
assemble nuclear bomb components if it chose to do so. The
Islamic Republic says it wants only peaceful nuclear energy.
Central to this issue will be the number of centrifuge
machines, which potentially can enrich uranium to bomb-fuel
quality, that Iran would be permitted to operate.
Tehran has about 10,000 centrifuges running but the West
will likely want that number trimmed to the low thousands, a
demand that could be unacceptable to the Islamic Republic.
Iran's research and development of new nuclear technologies
and the amount of stockpiled enriched uranium it may keep will
also be crucial and likely difficult to negotiate. Refined
uranium can be used as fuel in nuclear power plants or in
weapons if purified to a high enough level.
"Halting research and development of uranium enrichment has
never been up for negotiation, and we would not have accepted it
either," Iranian Deputy Foreign Minister Abbas Araqchi was
quoted as saying by the ISNA news agency.
"But a wide variety of issues have been discussed ... and
on uranium enrichment too we have tried to reach consensus."
Iran entered talks with the big powers after moderate
President Hassan Rouhani was elected last June.
"OUT OF CONTROL"
Diplomats have signalled some progress may have been made
during three rounds of expert-level talks since February on one
of the thorniest issues - the future of Iran's planned Arak
heavy-water reactor, which Western states worry could prove a
source of plutonium for nuclear bomb fuel once operational.
But the U.S. official cautioned that some media reports
about progress reached up until now were going too far.
"I've read a lot of the optimism you've written," the
official told reporters. "It's gotten way out of control."
Other diplomats from the powers warned that progress, if
any, in the coming talks will be slow. And any agreement may
come only at the 11th hour. "It's very difficult to say how it
will all work in practice now. We have no agenda but that's not
different from any other meeting," said one.
"The figures will come at the end. They will be part of the
big bargaining," he said, referring to decisions about issues
such as the number of centrifuges to remain in Iran.
Much of the complexity of the final agreement stems from the
fact that its various elements are intertwined. A higher number
of centrifuges left in Iran would mean the powers wanting
Tehran to more substantially slow down the pace of enrichment to
low levels, for example.
"All the parameters are interdependent," one diplomat said.
Politically, any deal could still be torpedoed by
conservative hawks in the United States or Iran, and another
interfering factor could be the approaching U.S. midterm
Divisions in Washington are closely linked to concerns in
Israel that any deal might not go far enough. "We are not
against diplomatic solutions. But on the one condition, that it
is a serious and comprehensive solution. A solution that can be
trusted," Yuval Steinitz, Israel's minister in charge of nuclear
affairs, told reporters in Brussels last week in Brussels.
(Additional reporting by Fredrik Dahl and Parisa Hafezi in
Vienna; Editing by Mark Heinrich)