* Israeli leader warns of war if powers drop sanctions
* Government in Israel sees deal easing sanctions 40 pct
* Western diplomats say no deal yet, negotiations secret
* Obama, Hollande insist they can keep Iran non-nuclear
* Kerry warns Congress new sanctions could wreck talks (Adds U.S. State Department comment)
Nov 13 (Reuters) - Israeli Prime Minister Benjamin Netanyahuwarned on Wednesday that a "bad deal" with Iran on its nuclearprogramme could lead to war and his aides challenged U.S.assertions to have offered Tehran only "modest" relief fromsanctions.
As details emerged of a Western proposal that could let Iransell oil and gold in return for curbs on its nuclear activities,an Israeli minister said the deal would negate up to 40 percentof the impact of sanctions, reducing pressure on Tehran to halta programme the West says has a military motive.
Israel, which calculated the value of direct sanctionsrelief on offer at $15-20 billion, has lobbied hard against anysuch deal and says the United States, its closest ally, is beingmisled by overtures of detente coming from Tehran.
Negotiations between Iran and six U.N. powers - the UnitedStates, Britain, France, Germany, Russia and China - arescheduled to resume on Nov. 20 with both sides saying they areoptimistic following talks at Geneva last weekend.
One source briefed on the discussions told Reuters that Iranwas being offered a chance to sell about $3.5 billion of oilover six months as well as $2-3 billion of petrochemicals and$1-2 billion of gold. The source, who criticised the offer, saidit would also let Tehran import some $7.5 billion of food andmedicine plus $5 billion of other goods currently barred.
Several Western officials involved in the talks said theywould not discuss details while negotiations were under way.
Iran says its nuclear programme is peaceful. The UnitedStates and the European Union agree with Israel that it isseeking a nuclear bomb and imposed tough oil and financialsanctions last year that have caused serious economic harm.
Addressing Israel's parliament in Jerusalem, Netanyahu saidcontinued economic pressure on Iran was the best alternative totwo other options, which he described as a bad deal and war.
"I would go so far as to say that a bad deal could lead tothe second, undesired option," he said, meaning war.
Israel, believed to be the sole nuclear power in the MiddleEast, has long warned it could use force to prevent Iran fromgaining a nuclear weapon that would threaten the Jewish state,creating tensions with the Obama administration.
Washington says it is important to seek a negotiatedsolution, especially since Iran elected a relative moderate thisyear as president, Hassan Rouhani - a man Netanyahu told theUnited Nations last month was a "wolf in sheep's clothing".
NOT SO MODEST
U.S. President Barack Obama said last week that a firstphase of any deal with Iran would involve "some very modestrelief" from sanctions that would be easily reversible.
But Israel says the benefits to Iran would be greater thanimplied and Tehran would do little to curb its ambitions.
Netanyahu's point man on Iran policy, Strategic AffairsMinister Yuval Steinitz, said on Wednesday the relief packageoffered could lower the annual cost of sanctions to Iran by upto $40 billion - out of a total annual cost of $100 billion.
He gave no detail of his calculation and, given secrecysurrounding the Western offer, it could not be verified.
Steinitz said Israel believed the sanctions put in place bythe United States and European Union last year cost Iran'seconomy around $100 billion per year, or nearly a quarter of itsnational output.
"The sanctions relief directly will reduce between $15 to$20 billion out of this amount," Steinitz said at anEnglish-language event hosted by the Jerusalem Press Club.
He also said that the proposed changes would make it moredifficult to enforce sanctions overall, and that this could inthe end provide a total benefit to Tehran of up to $40 billion.
"The damage to the overall sanctions, we believe, will besomething between $20 billion and maybe up to $40 billion," hesaid. "This is very significant. It's not all the sanctions.It's not the core sanctions about oil exports and the bankingsystem, but it's very significant relief for the Iranians."
Asked about the. $20 billion to $40 billion estimate, U.S.State Department spokeswoman Jen Psaki told reporters: "thatnumber, I can assure you, is inaccurate, exaggerated, and notbased in reality."
Other Western officials contacted by Reuters declined toconfirm or deny specific figures for the value of the sanctionsrelief on offer from the six powers and cautioned againstrevealing the terms of a possible deal at such an early stage.
"There is an offer on the table, and it seems to me that isconsiderable progress. We can't give any technical details andthe day anything leaks out is the day someone wants thenegotiations to fail," said one Western diplomat.
A European diplomat said details were being withheld onpurpose: "A decision was made to keep everything quiet, tightlyheld," the diplomat said, "Because there are extreme positionson both sides that could use this to discredit the process andtry to derail the negotiations."
After Obama discussed the negotiations by telephone withFrench President Francois Hollande, the White House dismissedtalk of a rift with Paris. The two leaders were in "fullagreement", it said in a statement, on an offer to Iran that was"a sound step toward assuring the international community thatIran's nuclear programme is exclusively peaceful".
In words addressing those who question Iran's good faith,Hollande's office said in a statement: "The two heads of stateexpressed their common will to obtain from Iran guarantees thatit is definitively abandoning its military nuclear programme."
Secretary of State John Kerry warned the U.S. Congress,where some members share Israel's scepticism on Iran, that anymove by the legislature to impose new sanctions could put an endto negotiations and "break them apart". (Reporting by Mayaan Lubell, Jeffrey Heller, John Irish,Richard Mably and Dan Williams; Writing by Peter Graff; Editingby Alastair Macdonald)
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