Iran has sharply stepped up its controversial uranium enrichment drive, the United Nations' nuclear agency said on Friday in a report that will further inflame Israeli fears that the Islamic Republic is pushing ahead with an atomic weapons program.

The UN International Atomic Energy Agency (IAEA) also reported its failed mission to Tehran this week that aimed to get Iran to respond to allegations of research relevant for the development of nuclear weapons - a serious setback to the possible resumption of diplomatic talks.

"The Agency continues to have serious concerns regarding possible military dimensions to Iran's nuclear program," the Vienna-based UN body said in a quarterly report about Iran issued to its member states.

Israel, which has threatened Iran with pre-emptive strikes on its nuclear sites, had no immediate comment on the report. Germany, which has backed tough new sanctions on Iran, said it was further cause for concern.

"Germany is very concerned about the latest report from the IAEA. We think Iran should understand the key to ending sanctions is in their own hands, they have a duty to cooperate with the international community," said German foreign minister Guide Wester.

The Islamic Republic's rapid expansion of work which can have both civilian and military purposes underlines that it has no intention of backing down in a long-running row with the West that has sparked fears of war in the Middle East.

Tehran says its nuclear program is exclusively for civilian purposes and denies it aims to make atomic weapons.

The confidential IAEA report said Iran has, since late last year, tripled output of uranium refined to a level that brings it significantly closer to potential bomb material, an official familiar with the agency's probe said.

Making clear the two sides were far apart, it said there were major differences on how to tackle the issue and that Iran had dismissed the IAEA's concerns as "unfounded". No further meetings are planned.

The setback increased concerns of a downward spiral towards conflict between Iran and the West, and sent oil prices higher.

IAEA director general Yukiya Amano urged Iran in the report to provide "early access" to Parchin, a military site near Tehran seen as central to the agency's investigations into possible military aspects of Iran's nuclear work.

The failure of the two-day IAEA visit could hamper any resumption of wider nuclear negotiations between Iran and six world powers - the United States, China, Russia, Britain, France and Germany - as the sense grows that Tehran feels it is being backed into a corner.

The IAEA report said Iran had carried out a significant expansion of activities at its main enrichment plant near the central city of Natanz, and also increased work at the Fordow underground facility.

Enriched uranium can be used to fuel nuclear power plants, which is Iran's stated aim, or provide material for bombs if refined much further, which the West suspects is Tehran's ultimate plan.

At Natanz, the IAEA report said 52 cascades - each containing around 170 centrifuges - were now operating, up from 37 in November.

At Fordow, almost 700 centrifuges are now refining uranium to a fissile concentration of 20 per cent and preparations are under way to install many more, the report said.

Nuclear 'break-out'

Fordow is of particular concern for the West and Israel as Iran is shifting the most sensitive aspect of its nuclear work - refining uranium to a level that takes it significantly closer to potential bomb material - to the site.

Estimated to be buried beneath 80 metres of rock and soil, it gives Iran better protection against any Israeli or US military strikes.

The report said Iran had now produced nearly 110 kg of uranium enriched to 20 per cent since early 2010. Western experts say about 250 kg is needed for a nuclear weapon, although it would need to be enriched much further.

An IAEA report in November suggested Iran had pursued military nuclear technology helped to precipitate the latest sanctions by the European Union and United States.

Iran last month said it had started to refine uranium to a fissile concentration of 20 per cent - compared with the 3.5 per cent it mainly produces at Natanz and which is used for nuclear power plants - at Fordow.

Nuclear bombs require uranium enriched to 90 per cent, but Western experts say much of the effort required to get there is already achieved once it reaches 20 per cent concentration, shortening the time needed for any nuclear weapons "break-out".

Reuters