* Iran increasing underground enrichment capacity
* Enrichment takes Iran closer to potential bomb material
* New machines not started up yet - diplomats
* Tehran rejects weapon allegations, says work is for fuel
By Fredrik Dahl
VIENNA, Oct 25 (Reuters) - Iran appears to have nearly finished installing centrifuges at its underground nuclear plant, Western diplomats say, potentially boosting its capacity to make weapons-grade uranium if it chose to do so.
Iran only disclosed the existence of the Fordow plant, built inside a mountain to shield it from air strikes, in 2009 after learning that Western spy services had detected it.
The United States and its allies are particularly worried about Fordow because Iran is refining uranium there to a fissile concentration of 20 percent, which Iran says it needs for a medical reactor.
The diplomats said they had heard of indications that Iran had put in place the last 640 or so uranium centrifuges of a planned total of some 2,800 at the site, but had not started running them yet.
“I understand that they have installed all the centrifuges there,” one envoy said.
Another diplomat said he also believed that the centrifuges had been placed in position, but that piping and other preparations needed to operate them may not yet be completed.
Twenty percent purity is only a short technical step from weapons grade, and the work goes to the heart of Western fears that a programme that Iran says is purely peaceful is in fact a cover for the development of a nuclear weapons capability.
Any move by Iran to increase output at Fordow would further alarm the United States and Israel, which have reserved the option to use military force to prevent Iran getting the bomb, and complicate on-off diplomatic efforts to resolve the dispute.
There was no immediate comment from Iran or the International Atomic Energy Agency (IAEA), the U.N. watchdog based in Vienna, which is expected to issue its next report on Tehran’s nuclear programme in mid-November.
Diplomacy and successive rounds of economic sanctions have so far failed to end the decade-old row, raising fears of Israeli military action against its arch enemy and a new Middle East war damaging to a fragile world economy.
Iran already has enough low-enriched uranium for several nuclear bombs if it were refined to a high degree, but may still be a few years away from being able to assemble a missile if it decided to go down that path, analysts say.
The IAEA said in its last report in August that Iran had doubled the number of centrifuges at Fordow to 2,140 in about three months.
But diplomats said the number of machines that were in operation, nearly 700, had not changed since early this year.
“The last I heard was that they (the newly installed centrifuges) were not operational,” one of the diplomats said.
It was not clear whether Iran was holding back for technical or political reasons. It is also not known whether the centrifuges that are not yet operating will be used for 5- or 20-percent enrichment, or both.
Iran may be able to accumulate up to four ‘significant quantities’ of weapons-grade uranium - each sufficient for one bomb - in as little as nine months from now, nuclear experts Olli Heinonen of Harvard University’s Belfer Center and Simon Henderson of the Washington Institute said in a paper.
“This timetable will shrink as more 20 percent enriched uranium is produced, at which point potential breakout time will be measured in weeks rather than months,” they said.
Nuclear experts say any country seeking to become a nuclear-armed power would probably only break out once it could produce at least several bombs.