* Iran's higher-grade nuclear stockpile worries West, Israel
* Iran says needs 20 percent uranium to fuel reactor
* Oxide conversions keep stockpile below Israel "red line"
By Fredrik Dahl
VIENNA, Nov 15 (Reuters) - Iran appears to have moved quickly to prevent a large increase in its most disputed nuclear stockpile, a new U.N. watchdog report indicates, in what may be an attempt not to undermine talks on a nuclear deal with six world powers next week.
The Islamic Republic's holding of uranium gas refined to a fissile concentration of 20 percent is closely watched by the West as it represents a relatively short technical step away from the level required for the core of an atomic bomb.
Israel, which has long warned it could use force to prevent Iran from gaining nuclear weapons, has said its foe must not obtain enough of this higher-grade uranium for one warhead if processed further. Iran says its work is peaceful and that it is Israel's assumed nuclear arsenal that threatens peace.
The powers, which are due to resume negotiations with Iran in Geneva on Nov. 20 on a preliminary deal towards ending the decade-old standoff over its nuclear programme, want Tehran to stop 20 percent enrichment and neutralise the stockpile.
Iran has over the past year in effect kept the amount of its 20 percent reserve well below Israel's so-called "red line" by converting a large part of the uranium gas into oxide to make fuel for a medical research reactor in Tehran.
"Iran does not want to provoke Israel to attack Iran. Especially now," said nuclear expert Mark Hibbs of the Carnegie Endowment for International Peace think-tank.
But conversion work was halted between Aug. 20 and Nov. 5, in part for maintenance reasons, according to the quarterly report by the International Atomic Energy Agency (IAEA), issued to member states late on Thursday.
As Iran continued its production of 20 percent uranium gas, the stockpile would probably have grown steadily during much of the August-November period covered by the report, perhaps to significantly above 200 kg, analysts and diplomats said.
IRAN SIGNALS RESTRAINT
The IAEA data suggests, however, that Iran moved fast once it resumed conversion early this month, leading to a more modest rise to 196 kg in the Nov. 14 report, up by about 10 kg since the previous one issued in late August.
Tehran may have done so by attaching a full cylinder of uranium gas to the conversion process, thereby reducing the stockpile, one nuclear expert said.
"There are rumours it got quite high - though not over the 'red line'," one Western diplomat in Vienna, where the IAEA is based, said. "I think the decision to blend down is politically driven."
Iran faced a "delicate balancing act," the envoy said: if it stops refining to 20 percent it gives in to the powers' demand for nothing. But if it fails to convert enough it risks provoking Israel and sends the wrong message to the West.
A senior diplomat familiar with the IAEA's report said Iran's move to stop converting during a couple of months for maintenance was "normal ... nothing exceptional".
The IAEA report showed that since Hassan Rouhani, a relative moderate, became president in August Iran had virtually stopped the expansion of its overall uranium enrichment capacity.
Iran says it is refining uranium to produce energy. But its refusal so far to scale back its nuclear programme and open it up to unfettered IAEA inspections has drawn tough sanctions that have severely damaged its oil-dependent economy.
However, the marked slowdown in the growth of activities of possible use in developing nuclear bombs may be meant to put substance in Rouhani's warmer tone towards the West after years of confrontation and strengthen Tehran's bargaining position.
"I think they were desperate to show that during this first IAEA report under Rouhani's tenure they were able to cap the capacity," proliferation expert Mark Fitzpatrick of the International Institute for Strategic Studies think-tank said.
"That whole image could have come undone if the amount of gasified 20 percent product had crept too close to 250 kg, so they had to make a rush effort to lower the amount."
The six powers - the United States, France, Russia, China, Germany and Britain - want Iran to curb its nuclear programme in exchange for limited sanctions relief as part of a confidence-building accord that would buy time for negotiations on a more far-reaching settlement. (Editing by Mark Heinrich)