Iran and the UN nuclear watchdog are making headway towards a framework deal on how to tackle concerns about its atomic activity, diplomats say, a potential bargaining chip for Tehran in next week's negotiations with world powers.

Iran says such an agreement is needed before it can consider a request by UN inspectors to visit the Parchin military site where they believe explosives tests relevant for developing nuclear weapons may have been carried out.

The International Atomic Energy Agency (IAEA) and Iran held talks this week in Vienna and are due to meet again on May 21, two days before Tehran and the six global powers discuss the future of its disputed nuclear program in Baghdad.

Western diplomats accredited to the UN agency said Iran seemed keen to agree a so-called 'structured approach' - an outline of how to address the IAEA's questions - ahead of Baghdad in the apparent hope of gaining leverage there.

They say they would welcome any sign that Iran is prepared to stop four years of stonewalling an IAEA investigation based on Western intelligence suggesting the Islamic state has researched ways to acquire the ability to produce nuclear bombs.

But they caution that it remains to be seen whether an understanding with the UN agency is implemented in practice, saying Iran in the past has used procedural haggling as a way to buy more time as its nuclear program advances.

'There are still some outstanding issues but there is a possibility an agreement is reached on Monday,' one Western diplomat said. It would be 'a step forward on the process side,' he said, suggesting it would signal real progress 'if it gets us to where we can finally address substance.'

He said it would be a relatively brief document on the scope and principles of how to pursue talks regarding possible military dimensions to Iran's nuclear program: 'No real details. Just a precursor to starting to ask real questions.'

The UN nuclear watchdog, tasked with preventing the spread of nuclear weaponry in the world, has made it clear it will only sign up to something that would enable it to carry out its investigation without restrictions, and not 'tie our hands'.

Two previous rounds of talks in Tehran early this year failed to make any notable progress. But both sides were more upbeat after the May 14-15 meeting in the Austrian capital, raising hopes of a possible outcome when talks resume on Monday.

A non-Western envoy said: 'Progress has been made. My impression is that both sides have the willingness to move forward.'

Iran denies having a covert atomic bomb agenda, saying it is enriching uranium only for a future network of civilian nuclear power stations and a medical isotope reactor.

Analyst Ali Vaez forecast a deal between the UN nuclear agency and Iran which could be both 'substantive and symbolic' but the final resolution of the IAEA's outstanding issues would depend on the outcome of higher-level diplomacy.

'For Iran, a tactical gain in Vienna can potentially become a strategic gain in Baghdad. Cooperation with the IAEA will put Iran one step ahead' of the six powers in the Iraqi capital, said Vaez, of the International Crisis Group think-tank.

But Iranian expectations of getting something in return for co-operating with the IAEA may be disappointed as any scaling back of sanctions would take an 'incredible amount of time,' said analyst Gala Riani of Control Risks, a consultancy.

'We would need much more significant moves by Iran.'

The West's main goal in Baghdad is to get Iran to stop higher-grade uranium enrichment it started two years ago and has since expanded, shortening the time needed for any weapons bid. Iran says it needs the uranium enriched to a fissile concentration of 20 per cent for its medical research reactor.

Enriched uranium can be used to fuel nuclear power plants if refined to low levels, Iran's stated aim, or provide the core of a nuclear bomb if processed to the 90 per cent level - which the West fears is the Islamic Republic's latent purpose.

Iran and the powers involved in nuclear diplomacy - the US, Russia, China, Britain, France and Germany - revived negotiations in Istanbul last month after a 15-month hiatus during which the West sharpened sanctions to an unprecedented degree - targeting Iran's oil trade and banks.

The resumption of diplomacy offers a chance to defuse that tension as well as worries about a new Middle East war.

Israel, widely thought to have the Middle East's only nuclear arsenal and convinced a nuclear Iran would pose a mortal threat, has - like the US - not ruled out air strikes to stop Iran's atomic progress if it deems diplomacy has failed.

Making clear his doubts about the prospects for diplomacy, Israeli Prime Minister Benjamin Netanyahu said Iran was likely to use the talks with world powers to buy time.

'It looks as though they see the talks as another opportunity to delay and deceive,' he told reporters in Prague. 'Iran is very good in playing this kind of chess game.'

The IAEA wants Iran to address issues raised by an agency report last year that revealed intelligence pointing to past and possibly ongoing activity in Iran of use in developing the means and technologies needed to build atom arms.

Iran says the intelligence is fabricated, but the UN agency says its inspectors need access to sites, documents and officials to reach credible conclusions in its inquiry.

The IAEA's priority is Parchin, where its report found that Iran had built a large containment vessel over a decade ago to conduct high-explosives tests that the UN agency said were 'strong indicators of possible' nuclear weapon development.

Western diplomats say they suspect Iran is cleaning the site to remove incriminating evidence, a charge Tehran dismisses.

Karim Sadjadpour of the Carnegie Endowment think-tank said Iran had felt no incentive to be transparent with the IAEA about past illicit or weapons-related activities out of fear that doing so would only further incriminate Tehran.

'For an agreement to be reached I think Iran would have to be offered, and would have to accept, a nuclear plea-bargain,' Sadjadpour said.-Reuters