Iran, six powers making progress in 'tough' nuclear negotiations

(Adds White House comment In paragraphs 26 and 32)

* U.S. wants first step from Iran to curb nuclear activity

* Iran says breakthrough deal possible but talks difficult

* Israel warns of "mistake of historic proportions"

* U.S. Senate panel to move forward on new sanctions

* Iran has warned more sanctions would torpedo deal

By Louis Charbonneau and Justyna Pawlak

GENEVA, Nov 7 (Reuters) - Iran and six world powers appeared to be edging towards a preliminary deal on its nuclear activity on Thursday, citing progress in talks capitalising on a diplomatic opening from Tehran, though it cautioned that the discussions were "tough".

The United States said the powers would consider relaxing some sanctions against Iran if it takes verifiable steps to limit its nuclear programme - a long elusive compromise that could reduce the risk of another Middle East war.

Lending urgency to the process, a U.S. Senate committee said it would pursue a package of tough new sanctions on Iran after the current Geneva talks end on Friday. Any more punitive sanctions would torpedo hopes for a deal, Iran has warned.

President Barack Obama has urged Congress to hold off on more steps to isolate Iran, as called for by its arch-enemy Israel, to avoid derailing prospects for a deal the powers hope will deter any Iranian advance towards nuclear arms capability.

Michael Mann, a spokesman for the European Union foreign policy chief Catherine Ashton - who is presiding over the talks - said on Thursday evening that the powers and Iran were "making progress" towards easing a decade-long standoff over Iran's nuclear programme.

Mann said Ashton would meet Iran's foreign minister and chief negotiator, Mohammad Javad Zarif, on Friday morning "to allow more time to work through some issues". Diplomats from the six nations would also meet early on Friday to prepare Ashton's talks with Zarif.

Zarif told Reuters earlier in the day: "The talks went well ... I'm hopeful that we can move forward. We are making progress, but it's tough."

In an interview with CNN later, Zarif suggested that a partial suspension of Iran's contested uranium enrichment campaign might be possible - a concession it ruled out before moderate President Hassan Rouhani's landslide election in June.

"There won't be a suspension of our enrichment programme in its entirety," Zarif said, rejecting Israel's central demand.

But he said he hoped the sides would agree a joint statement on Friday stipulating a goal to be reached "within a limited period of time, hopefully in less than a year", and a series of reciprocal actions they would take "to build confidence and address their most immediate concerns.

"I believe it is possible to reach an understanding or an agreement before we close these negotiations tomorrow evening."

Iran says it is enriching uranium only to fuel future nuclear power stations and wants the powers to start lifting harsh sanctions severely damaging the OPEC giant's economy.

BREAKTHROUGH FAR FROM CERTAIN

The powers are aiming for a "first step" deal to allay suspicions the Islamic Republic, which has concealed nuclear work from U.N. inspectors in the past and continues to restrict their access, is covertly seeking the means to produce atomic bombs. But both sides said a breakthrough was no certainty.

The United States said it also held "substantive and serious" bilateral talks with Iran in Geneva - direct dialogue inconceivable before Rouhani took office pledging to build bridges abroad and end a slide towards conflict with the West.

Iran and the United States have had no diplomatic ties since soon after the 1979 Islamic Revolution that overthrew the U.S.-backed monarchy, and their mutual mistrust and enmity has posed the biggest obstacle to any breakthrough nuclear accord.

White House spokesman Jay Carney said that in exchange for "concrete, verifiable measures" of restraint by Iran, the six powers "would consider limited, targeted, and reversible relief that does not affect our core sanctions architecture".

The broader sanctions regime would stay pending a "final, comprehensive, verifiable" accord, Carney told reporters in Washington. If Iran did not follow through towards this end, modest sanctions relief could be reversed and stiffer penalties imposed.

DIPLOMACY VULNERABLE TO HARDLINERS AT HOME

The U.S. Senate Banking Committee chairman declared the panel was moving forward on a proposal for new sanctions, a step likely to please Israel which has campaigned against compromise proposals under discussion in Geneva, describing them as potentially "a mistake of historic proportions".

Senator Tim Johnson, a Democrat, said Senate Majority Leader Harry Reid instructed him to bring the bill closer to a vote by the full Senate by calling for a debate on it.

Both sides have limited leeway for compromise, with conservative hardliners in Tehran and in Washington likely to denounce any concession they regard as going too far.

Iranian Deputy Foreign Minister Abbas Araqchi said after the morning meetings that he hoped a deal could be struck but "the differences are widespread and deep. This is undeniable".

The Iranian delegation held a series of meetings - one with all three European delegations, then, separately, with the Russians, the Chinese and the Americans.

Araqchi met for an hour with U.S. delegation chief Wendy Sherman, under secretary of state for political affairs, in a meeting that a senior State Department official described as a "substantive and serious conversation".

ROLLING BACK NUCLEAR PROGRAMME?

The United States and its allies say they are encouraged by Tehran's shift to softer rhetoric since the election of Rouhani. But Western allies say Iran must back its words with action and take concrete steps to scale back its atomic work.

Washington says that would buy time for Iran and the powers to reach a broader diplomatic settlement and avert any war that could cause global economic upheaval.

"It remains our assessment that Iran would need at least one year to acquire one nuclear weapon from the time that Iran decides to pursue one," Carney said, describing the U.S. view of a potential "breakout move" by Tehran toward building an atomic bomb. "In other words, we would be essentially buying time."

The exact nature of a possible first step remain unclear. But the six global powers are unlikely to agree on anything less than a suspension of enrichment of uranium to 20 percent fissile purity, a level that constitutes a technical milestone not far from the threshold for a nuclear warhead.

They want Iran to convert its stockpile of 20 percent uranium to an oxide form suitable for processing into reactor fuel, and take other measures to slow the programme.

In return for any concessions, Iran wants the powers to lift the sanctions that have slashed its oil revenues by 60 percent since 2011 and cut the value of its currency in half.

The U.S. official said Iran at this stage must address important aspects of its nuclear activity, including more intrusive U.N. inspections. Iran's construction of a research reactor near the town of Arak is also a growing concern for the West because of its potential to yield plutonium for bombs.

A senior aide to a U.S. senator briefed by the White House and State Department said Washington would offer to work with Iran in a six-month confidence-building period. During that time Washington would offer Tehran, among other things, relaxing the restrictions on Iranian funds held in overseas accounts.

While declining to specify the type of sanctions relief under consideration, Carney said the actions "might be more financial rather than technical" and would be "the kinds of things that we could turn on and off pretty quickly."

Western diplomats involved in the talks are hesitant to divulge specifics about the discussions due to sensitivities involved. But Israeli Prime Minister Benjamin Netanyahu said he disliked the outlines of an initial deal being hinted at in Geneva since it would allow Iran to keep a nuclear capability.

"Israel totally opposes these proposals," he said in a speech. "I believe that adopting them would be a mistake of historic proportions. They must be rejected outright."

Widely assumed to be the Middle East's only nuclear power, Israel views Iran as a threat to its existence and has warned it could carry out pre-emptive strikes on Iranian nuclear sites if diplomacy fails to restrain the programme. (Additional reporting by Yeganeh Torbati and Fredrik Dahl in Geneva, Timothy Gardner, Roberta Rampton and Matt Spetalnick in Washington, Marcus George in Dubai, and Michelle Nichols in New York; Editing by Mark Heinrich and Mohammad Zargham)