By Fredrik Dahl and Justyna Pawlak
VIENNA/BRUSSELS (Reuters) - Major powers will hold their first talks with Iran this week in more than a year, hoping Tehran will give enough ground over its nuclear program to continue negotiations and avert the threat of a Middle East war.
Israel has hinted at military strikes on Iran, arguing time is running out to stop it developing atomic arms; Iran says it could respond by closing a major oil shipping thoroughfare, aware that would push up crude prices and hit the world economy.
The six powers - the United States, France, Germany, China, Russia and Britain - will not lay out demands when the talks open in Istanbul on April 14, a Western diplomat said, but will be looking for signs Iran is ready to make concessions.
"The onus is on them in this first meeting to demonstrate that they are serious about a negotiation over their nuclear program. If they are, we will get into detail on what that would look like," the diplomat added.
Iran - which will be represented by its chief nuclear negotiator Saeed Jalili - says it will put forward "new initiatives" in Istanbul but has given no details. Tehran says its nuclear program is purely peaceful.
The West hopes tough sanctions on Iran's oil exports will persuade Tehran to take meaningful steps - possibly on ending higher levels of uranium enrichment.
But they will be wary of any Iranian attempt to buy time with "talks about talks" on resolving the decade-long dispute.
The discussions will be "a gauge as to whether Iran is indeed serious about dealing" with international concerns, a Western envoy said, adding its track record did not "augur well".
The last time Iran and the powers - led by European Union foreign policy chief Catherine Ashton - sat down together in early 2011, they could not even agree an agenda.
"The clock is definitely ticking. This may be the last best chance for diplomacy," senior researcher Shannon Kile at the Stockholm International Peace Research Institute (SIPRI) said.
If diplomacy fails, "you could be looking at the possibility of conflict in the region," said Daniel Keohane of FRIDE, a European thinktank.
Iran has consistently ruled out suspending all enrichment, a process which can have both civilian and military purposes. But it has hinted it may stop refining uranium to higher levels and diplomats and analysts expect this to be a focus of discussions.
Two years ago, Iran spurned U.N. demands to halt enrichment and ramped up processing to 20 percent purity, a big step on any path to the 90 percent level needed for nuclear arms. The West responded with broad sanctions on its banks and oil exports.
The country's 20 percent enrichment at a facility deep inside a mountain is "very high on our list of things where Iran would need to stop to begin convincing us about the peaceful nature of their program," a third Western diplomat said.
Iranian nuclear energy chief Fereydoun Abbasi-Davani said on Sunday Tehran might scale back this production - which compares with the up to 5 percent level usually required to fuel nuclear power plants - once it has what it needs for medical isotopes.
"The 'enrich what we need' principle provides the Iranians with a face-saving solution for halting enrichment at 20 percent," said analyst Ali Vaez at the International Crisis Group thinktank. "Overall, I'm cautiously optimistic."
But a U.S.-based thinktank, the Institute for Science and International Security (ISIS), said the powers "should reject anything less than an immediate freeze" of the higher-level enrichment, which Iran says is intended for a research reactor.
"Abbasi-Davani's offer appears to be part of Iran's ongoing effort to hedge its nuclear options ... while maintaining the option to break out and make nuclear weapons," ISIS said.
NO IRANIAN CHANGE OF HEART?
Russia and China last month joined the four Western powers in expressing "regret" over Iran's expansion of this higher-grade enrichment, most of which is now taking place at an underground site to protect it against Israeli or U.S. attacks.
But Moscow and Beijing have made clear their opposition to any new U.N. measures and have criticized unilateral U.S. and European punitive steps.
Israel says it fears Iran will soon have moved enough of its nuclear program underground to make it virtually impervious to a unilateral Israeli attack, creating what Defense Minister Ehud Barak recently referred to as a "zone of immunity".
If Iran limits its nuclear work, which it says is to generate electricity and make medical isotopes to treat cancer patients, it would probably expect to be rewarded with an easing of sanctions.
"There is a need for both sides to meet each other half way, to show some flexibility," a senior diplomat from a non-Western country said, urging "creative and innovative ideas".
Western punitive steps over Iran's refusal to back down have piled pressure on the economy, said Mohammed Shakeel, an independent analyst based in Dubai across the Gulf from Iran.
"The country's economy is showing strong signs of strain: real Gross Domestic Product is likely to contract over the next year or two as the mainstay of the economy - oil production - is expected to fall and export revenue declines," Shakeel said.
But there is no indication tougher sanctions have prompted a change of heart by Iran's top authority, Supreme Leader Ayatollah Ali Khamenei, one of the Western diplomats said.
"We see no sign of it changing the strategic calculus of the supreme leader," he said.
(Additional reporting by Arshad Mohammed in Washington and Adrian Croft in London; editing by Philippa Fletcher)