* Iran, powers to meet again in Baghdad on May 23
* Diplomats say hard work remains after positive Istanbul talks
* Iran rejects uranium enrichment halt; seeks sanctions easing
* U.S. says talks so far not enough for any such relief
By Fredrik Dahl and Justyna Pawlak
ISTANBUL, April 15 (Reuters) - Renewed diplomacy on Iran’s nuclear programme will muffle what Barack Obama last month called the “drums of war”, but the beat will soon get louder if warm words do not lead swiftly to action that can defuse the decade-old dispute.
For over a year until this weekend in Istanbul, negotiations had been frozen; aides to the U.S. president have warned of a “closing window” for talking before Washington, or its Israeli ally, might start shooting; and Tehran, squeezed by Western sanctions, threatened to blockade Gulf tankers - all of which had driven up oil prices for an already labouring world economy.
Saturday’s meeting in Turkey between diplomats from Iran and six world powers should release some tension for now, even if it was notable only for a shared willingness simply to resume talks on a nuclear energy programme the West says is a cover for weapons research, and for what all sides called a “constructive” atmosphere that merited meeting again on May 23, in Baghdad.
But with opposing camps each portraying the new negotiations as a victory for its own tough line - whether Western sanctions, Israeli bombing threats or Iran’s accelerated output of highly enriched uranium - ending the crisis needs hard compromises all round, which profound mistrust has rendered impossible so far.
That Iran could pursue nuclear technology in a way the West does not see as threatening is the sort of resolution spoken of, but achieving it after years of animosity remains a challenge.
“Anything but continuing to be wary would not be realistic,” a senior Obama administration official told reporters, striking a cautious note in Istanbul. “There is no reason to believe yet that we will make all of the progress that we want to make.”
British Foreign Secretary William Hague, whose country has long traded charges of duplicity with Tehran, warned on Sunday: “It would be a mistake to be starry-eyed about talks with Iran.”
Israel repeated its impatience with the process - Prime Minister Benjamin Netanyahu complained of giving Iran a “freebie” while it continued to develop its nuclear capacities.
Yet international security expert Jim Walsh of the Massachusetts Institute of Technology said the new talks should stay Israel’s hand: “This outcome reduces - but does not eliminate - the chances that Israel launches a military strike,” he said. “But the test will be whether there is substantive progress at the meeting next month.”
A step back from the brink might involve Iran, where the clerical authorities under Supreme Leader Ayatollah Ali Khamenei have used nuclear nationalism to court popular support, halting production of the most dangerous materials - uranium enriched to a fissile purity of 20 percent or more - in return for the Western powers accepting its other nuclear development plans.
One Iranian newspaper said in an editorial on Sunday that it already detected signs of a compromise, believing Western officials were no longer opposed - in private at least - to Iran’s “right to enrich” uranium at least to the 3 to 5.5 percent that is enough for making electricity but not bombs.
That was a “strategic change”, Kayhan newspaper said.
Such talk does not impress Israel, which says oil-rich Iran does not need nuclear power, cannot be trusted and threatens the very survival of the Jewish state, which is assumed to have the only nuclear arsenal in the Middle East.
Netanyahu said negotiators from the six powers - the United States, Russia, China, France, Britain and Germany - had fallen for Iranian stalling tactics: “It’s got five weeks to continue enrichment without any limitation, any inhibition,” he said.
“The world’s greatest practitioner of terrorism must not have the opportunity to develop atomic bombs.”
A European diplomat who is based in Vienna, home of the U.N. nuclear watchdog, and whose government is not directly involved in the negotiations with Iran, was also deeply sceptical.
“Contrary to the prevailing mood, I am not overly optimistic,” he said. While talks go on, “centrifuges are spinning and enriching and there will be extra time to conceal and disperse the elements of the military programme”.
Another Israeli minister, Danny Ayalon, reaffirmed the government’s demand that Iran halt all its nuclear activities.
U.S. commitments to Israel are a re-election campaign issue for Obama as he fights Republican charges of being soft on Israel’s Muslim foes, so a swift public easing of Washington’s demands on, and sanctions against, Iran seem unlikely barring a major shift in Tehran before the November presidential vote.
The administration official in Istanbul said there was no prospect of easing sanctions now, and that both U.S. financial measures and a European Union oil embargo on Iran due to come into full effect in July should be implemented as planned.
Iran’s chief negotiator Saeed Jalili dismissed any talk of suspending Iran’s lately expanded uranium enrichment programme and said he wanted to see sanctions being lifted, something he said was in the interests of European consumers now being hit by the effects of a gradual EU import embargo on Iran’s oil.
Cliff Kupchan, a Middle East analyst at consultancy Eurasia Group, said that as long as talks continued some of the “Iran premium” would come off the oil price, which has been pushed up by fears of a supply disruption from the major crude producer.
“So we get relief on oil markets, but investor beware: the party could end very quickly,” Kupchan said.
At KBC Energy Economics, Samuel Ciszuk said: ”The fact that talks have not broken down, but will continue is very positive, given the low expectations, and this will provide us with another month in which oil markets will dare to concentrate more on the fundamentals and less on the political risk.
“That should in itself be bearish on oil prices.”
However, he viewed as “unlikely this early” any compromise in which Iran sacrificed its 20-percent enrichment facilities in return for the West accepting that it make its own reactor fuel.
Sanctions pressure was dramatically ratcheted up after the U.N. nuclear watchdog, in a detailed report last November, gave independent backing to suspicions that Iran is carrying out research and development relevant for nuclear weapons.
Western diplomats now hope that Iran’s increasing isolation - economically, through sanctions, and politically, as its key Arab ally Syria descends into crisis - will force it to change course and address their mounting concerns about its aims.
The senior U.S. official said: “While the atmosphere today was positive and good enough to merit a second round we continue to stress ... that there is urgency for concrete progress and that the window for a diplomatic resolution is closing.”
Emanuele Ottolenghi at the Foundation for the Defense of Democracies, a Washington think-tank, said, however, that the broad sanctions were unlikely to be toughened much more while diplomacy under way: “If Iran truly begins to do what it has to do, to comply with its international obligations, it is only natural that some sanctions should be eased,” Ottolenghi said
An Iranian political expert, who spoke privately, said a shift in Iranian domestic politics may also ease negotiations.
President Mahmoud Ahmadinejad and his rivals in the clerical leadership, seeking popularity with voters, had at times seemed to outbid each other in taking a hard line on nuclear diplomacy. Ahmadinejad’s recent eclipse by Supreme Leader Khamenei may make for a more consistent Iranian approach - and give negotiators more leeway to make an unpopular climbdown on nuclear policy.
“Khamenei’s office is now playing a more pronounced role in all major affairs,” the Iranian expert said.
“It has created a consensus to defuse the nuclear crisis, at least for the time being, from getting out of control.”
“SPIRIT OF ISTANBUL”
Many analysts and some diplomats say both sides must compromise for any chance of a long-term settlement: Iran would be allowed to continue limited low-level enrichment if it in return accepts much more intrusive U.N. nuclear inspections.
One senior diplomat, speaking on the eve of the Istanbul talks, said the nuclear dispute was an “eminently” solvable problem but that the deep trust deficit must be bridged.
The “contours” of a solution can be seen, the diplomat said, suggesting Iran in the “right circumstances” may be able to keep refining uranium to levels far below the purity required for the fissile core of a nuclear warhead.
Referring to U.N. Security Council resolutions demanding a suspension to all of Iran’s enrichment-related work, he added: “That is where we start from but we are here to negotiate.”
But another diplomat in Istanbul said this was a distant prospect: “The confidence is not there. After months or years when we have full confidence, then why not?”
Trita Parsi, an expert on Iranian-U.S. relations in Washington, said both sides effectively compromised in order to hold this weekend’s talks - even if they tried to suggest that it was pressure which brought the other side to the table.
“The real challenge will come in the ensuing rounds of talks, where these principles of engagement will have to translate into concrete steps. It is at that point that we will see if the two sides are ready to pay the domestic political cost of compromise,” he said of Iranian leaders’ willingness to scale back nuclear development and the West’s to ease sanctions.
From the West’s point of view, the urgent priority is to get Iran to stop the higher-grade uranium enrichment it started two years ago and has since ramped up, shortening the time it would need for any “break out” to assemble atomic bombs.
Iran has signalled some flexibility on this 20-percent enrichment - which it says is to fuel a medical research reactor - but also that it has no plans to halt it any time soon.
Ali Vaez of the International Crisis Group said the Istanbul meeting constituted a “very positive” first step: “The next round will be more technical and sensitive,” he said. “Both sides have to carefully navigate the minefield ... between the talks and rigorously pave the ground for a negotiated solution.”
But if oil buyers - and everyone living in the Middle East - breathe easier now that talking is under way, the stakes have also been raised, should the next meeting fail to build on that:
At the Council on Foreign Relations in Washington, Ray Takeyh said a failure of this new round of talks could set the drums of war beating even louder: “What happens,” he asked, “When the Spirit of Istanbul meets the reality of Baghdad?”