Iran's President Mahmoud Ahmadinejad attends a news conference in Tehran, February 18, 2007. [Reuters]

VIENNA- A U.N. watchdog report due on Thursday is likely to confirm Iran has escalated rather than halted its nuclear fuel program, exposing Tehran to wider sanctions over fears it is secretly seeking atom bombs.

As a 60-day grace period for it to stop enriching uranium expired on Wednesday, Iran offered to guarantee it was not pursuing nuclear weapons, but only as part of negotiations. It has refused to shelve the program as a precondition for talks.

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"The Iranian nation defends its rights. The nuclear right is demanded by all Iranians and no one in the world can deprive the Iranian nation of its right," President Mahmoud Ahmadinejad said in a speech in northwest Iran, ISNA news agency reported.

Defying terms set by six world powers for talks on trade incentives means the U.N. Security Council in coming weeks could weigh broadening the limited sanctions it imposed on Tehran in December.

Ahmadinejad does not have the final say in nuclear policy, but the highest authority, Supreme Leader Ayatollah Ali Khamenei, has also said Iran will press ahead with work that Iranian officials insist is aimed at generating electricity.

"The Iranians have unfortunately not acceded to the international community's demands and we will have to consult. We will have to decide how to move forward," U.S. Secretary of State Condoleezza Rice said in Berlin on Wednesday.

Rice, German Foreign Minister Frank-Walter Steinmeier, Russian Foreign Minister Sergei Lavrov and EU foreign policy chief Javier Solana were to meet in Berlin on Thursday to discuss next steps on Iran.

The Security Council commissioned the International Atomic Energy Agency (IAEA) to report on whether or not Iran had heeded the deadline for it to mothball enrichment-related activity.

Tehran's defiance and leaks about Iran's efforts to shift from modest experimental enrichment toward "industrial-scale" output of atomic fuel, made the IAEA verdict almost a foregone conclusion.

Barring an improbable turnaround by Iran, "I will have to report negatively," IAEA director Mohamed ElBaradei told Britain's Financial Times newspaper in an interview this week.

The West fears Iran, which hid enrichment research from the IAEA for 18 years and has since impeded investigations meant to ascertain whether its program is wholly peaceful, is trying to make bombs under cover of a civilian nuclear energy program.

INSTALLING CENTRIFUGES

Iran, the world's fourth largest oil exporter, says it wants to build a network of nuclear power plants to prepare for the day crude reserves run out and to maximize exports in the meantime. Its first atomic power plant is not yet finished.

The IAEA report will confirm that Iran has begun installing the first batch of 3,000 centrifuge machines earmarked for its vast underground Natanz plant this year, laying a basis for "industrial-scale" enrichment involving some 54,000.

ElBaradei told the Financial Times that at least one cascade, or fuel-cycle network, of 164 centrifuges was already set up. Diplomats monitoring findings by inspectors said several more cascades had been erected as well.

Two diplomats said Iranian workers lowered into the plant a nine-tonne container of uranium hexafluoride gas to prepare to begin feeding centrifuges, which can enrich the material into fuel for power plants or, if refined to high levels, for bombs.

But the report was also likely to say that Iran was still enriching only tiny amounts in two cascades in the above ground pilot wing of Natanz, reflecting continued difficulties in running centrifuges for long periods without breakdowns.

Iran remains three to 10 years away from accumulating industrial volumes of enriched uranium sufficient for the core of nuclear bombs, assuming it wants them, according to intelligence estimates and independent nuclear analysts.

Diplomats close to the IAEA said the new report would provide no significant new information on long burning questions about Iran's program, such as mysterious traces of bomb-grade uranium and alleged military involvement in enrichment research.

Iran has repeatedly promised to clear up such issues. But diplomats say it is withholding answers as bargaining chips for any future settlement with world powers on the Security Council, whom it accuses of illegal bullying over its nuclear project.