By Fredrik Dahl

VIENNA (Reuters) - Member states of the U.N. nuclear agency on Friday rejected an Iranian-backed Arab bid to single out Israel for criticism over its assumed atomic arsenal, in a diplomatic victory for Western powers that opposed the initiative.

The debate and vote at an annual meeting of the 159-nation International Atomic Energy Agency (IAEA) underlined divisions at a time when the United States and its allies are hoping for progress in a separate, decade-old nuclear dispute with Iran.

Arab states had submitted a non-binding resolution on Israel to the gathering in Vienna for the first time since 2010 to signal their frustration at the lack of movement in efforts to create a Middle East zone free of weapons of mass destruction.

Fifty-one countries voted against the text, which called on Israel to join the nuclear Non-Proliferation Treaty (NPT), and 43 states for. Others abstained or were absent.

The United States said earlier that targeting its close ally would only hurt broader steps aimed at banning nuclear and other weapons of mass destruction in the tinderbox region.

Israel is widely believed to possess the Middle East's only nuclear arsenal, drawing frequent condemnation by Arab countries and Iran which say it threatens peace and security.

U.S. and Israeli officials - who see Iran's atomic activity as the main proliferation threat - have said a nuclear arms-free zone in the Middle East could not be a reality until there was broad Arab-Israeli peace and Iran curbed its program.

INTERNATIONAL CONFERENCE

The U.S. envoy to the IAEA, Joseph Macmanus, said the United States regretted that the resolution had been brought to a vote.

"There are no winners today," Macmanus said. "We will look ahead and continue the hard work to start a constructive dialogue on the establishment of a weapons of mass destruction free zone in the Middle East."

An Israeli diplomat said the "positive outcome gives better prospect to Middle East dialogue".

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Israel and the United States accuse Iran of covertly seeking a nuclear arms capability, something Tehran denies. The election of a relative moderate, Hassan Rouhani, as new Iranian president has raised hopes of an easing of tension with the West.

World powers agreed in 2010 to an Egyptian plan for an international conference to lay the groundwork for creating a Middle East free of weapons of mass destruction.

But the United States, one of the big powers to co-sponsor the meeting, said late last year it would not take place as planned last December and did not suggest a new date. Britain, another sponsor, says it hopes it can still take place in 2013.

British Ambassador Susan le Jeune d'Allegeershecque said the Arab resolution was divisive but added that the delay in holding the conference had "generated understandable frustrations".

Arab diplomats said they refrained from putting forward the resolution on Israel at the 2011 and 2012 IAEA meetings to boost the chances of the Middle East conference but it had no effect.

Arab League Ambassador Ramzy Ezzeldin Ramzy earlier told Reuters: "The Israelis have been playing for time, delaying."

Like in previous years, the IAEA conference overwhelmingly adopted a separate resolution urging all Middle East countries to accede to the NPT, without mentioning Israel by name.

(Editing by Alison Williams)