The Bush administration said yesterday that it welcomed the prospect of increased "people-to-people" contact between Americans and Iranians, as it pushed ahead at speed with plans to establish a diplomatic presence in Tehran.

The White House and the State Department refused to deny a Guardian report that a decision has been taken to set up a US-interests section in Tehran, marking the first return of its diplomats to the city since the 1979-81 Iranian revolution.

A source familiar with the decision-making said the Bush administration has either already, or would over the next few days, lodge a formal request with the Iranian government to set up an interests section, a halfway-house to an embassy.

Sean McCormack, the US state department spokesman, responded to questions from reporters by saying: "We are not going to discuss the internal workings of the US government."

But he went on to pave the way for an announcement by saying that the US is keen to encourage "people-to-people exchanges" and listed a series of contacts between Americans and Iranians, including visits by artists and a planned trip by Iran's Olympic team to the US.

The US is waiting to get all its ducks in a row before going public about the interests section. The key is formal approval by the Iranian government, which has already said it would welcome the prospect.

The US has to decide where to house the interests section. Having an independent office is problematic: the British embassy, established 10 years ago in central Tehran, is frequently a target for demonstrations, stone throwing and even gun-shots. US diplomats could operate out of the Swiss embassy, which looks after US interests at present, but the Swiss might not welcome the prospect of becoming a target.

The planned establishment of a presence in Tehran, and the decision to send a senior US diplomat, undersecretary of state William Burns, to face-to-face talks in Geneva tomorrow, marks a sea change by the Bush administration.

Iran's foreign minister, Manouchehr Mottaki, yesterday described the US decision to send Burns as "positive", adding: "We look forward to constructive engagement."

The Iranian government is to deliver its response to a European Union list of incentives aimed at persuading Tehran to suspend its uranium enrichment programme, which the US, Israel and the major European countries see as a prelude to achieving a nuclear weapons capability.

The French foreign minister, Bernard Kouchner, said he did not know what the response of the Iranians to the offer would be. "We are waiting for an opening," he told reporters. "I talked to Mottaki and he was open, but open to what? That is always the case. We talk and talk with the Iranians, but it's always disillusion."

He said Tehran was still not addressing "the core of the subject" - an enrichment suspension, or an interim freeze on steps to expand the activity, in order to get preliminary negotiations going. "I have lots of hope for these talks, but I don't expect anything. France has had lots of talks with Iran [on nuclear issues] but they have never produced anything," Kouchner said.

Barack Obama, the Democratic presidential candidate, welcomed the Bush administration's shift. One of the main planks of his foreign policy is to meet the Iranians face to face, including the Iranian leader, Mahmoud Ahmadinejad.

His Republican rival, John McCain, said he had "no problem ... whatsoever" with Burns going to the Geneva meeting, but repeatedly said he would not meet Ahmadinejad. "To sit down without any preconditions with a state sponsor of terror would be a mistake," he said. Burns is holding talks with the International Atomic Energy Agency in Vienna before the Geneva meeting, to be briefed on India's nuclear programme, as well as Iran's.