Iran said on Tuesday any exchange of nuclear fuel must take place on its territory, a condition rejected by Western powers seeking to prevent it stockpiling material which could be further enriched to make a bomb.

The United States and its allies hope to get new United Nations sanctions imposed on Iran in the coming weeks over its continued uranium enrichment, after failing to reach agreement on the fuel exchange.

But China expressed reservations on further sanctions, saying greater diplomatic efforts were needed.   

Western countries fear Iran wants to stockpile uranium to enrich it to levels that could be used for nuclear weapons. Iran says its sole aim is to run nuclear energy plants to generate electricity and produce medical isotopes.   

"In order to bring about a constructive interaction, we have declared our readiness for fuel swap, provided it is done within the country (Iran)," foreign ministry spokesman Ramin Mehmanparast said.

"We are prepared for a fuel swap even though we do not regard this condition of supplying fuel to the Tehran research reactor through a swap as correct."    

Earlier this month Iran announced a start to higher-scale enrichment which would refine uranium to 20 percent purity -- the level of enrichment it would have received under the proposed nuclear fuel deal. Tehran said it was making the move because the West was dragging its feet over the exchange.   

The International Atomic Energy Agency (IAEA) said in a report last week that Iran may now be working to develop a nuclear-armed missile, providing further grist to Western countries hoping to persuade China, which has UN Security Council veto power, to back harsher sanctions.   

But China, which has faced Western sanctions itself in the past, has resisted calls for tough measures against Tehran.   

"We hope relevant parties can show flexibility to create conditions for completely and properly solving the Iran nuclear problem through diplomatic efforts," Foreign Minister spokesman Qin Gang told a news briefing on Tuesday.

Mehmanparast said Iran had sent a letter to the IAEA declaring its readiness to cooperate in providing fuel for its Natanz reactor -- an offer which is a non-starter for the West.   

A copy of the letter, seen by Reuters, said fuel stock at Iran's Natanz reactor was "approaching its end."         

Both the United States and Iran appear to be upping the stakes in the stand-off. Iran said on Monday it had earmarked potential sites for 10 new nuclear enrichment plants, two of which could see construction start this year. The same day, Israeli Prime Minister Benjamin Netanyahu called for an embargo on Iran's energy sector, even if the UN does not back such a move. - Reuters