WASHINGTON (Reuters) - A new U.S. intelligence report says Iran halted its nuclear weapons program in 2003 and it remains on hold, contradicting the Bush administration’s earlier assertion that Tehran was intent on developing a bomb.

A technician is seen at the uranium conversion facility in Isfahan, south of Tehran, February 3, 2007. A new U.S. intelligence report says Iran halted its nuclear weapons program in 2003 and it remains on hold, contradicting the Bush administration's earlier assertion that Tehran was intent on developing a bomb. REUTERS/Caren Firouz

The National Intelligence Estimate (NIE) released on Monday could undermine U.S. efforts to convince other world powers to agree on a third package of U.N. sanctions against Iran for defying demands to halt uranium enrichment activities.

Tensions have escalated in recent months as Washington has ratcheted up the rhetoric against Tehran, with U.S. President George W. Bush insisting in October that a nuclear-armed Iran could lead to World War Three.

But in a finding likely to surprise U.S. friends and foes alike, the latest NIE concluded: “We do not know whether (Iran) currently intends to develop nuclear weapons.”

That marked a sharp contrast to an intelligence report two years ago that stated Iran was “determined to develop nuclear weapons.”

But the new assessment found Iran was continuing to develop technical means that could be used to build a bomb and it would likely be capable of producing enough enriched uranium for a nuclear weapon “sometime during the 2010-2015 time-frame.”

The shift in the intelligence community’s thinking on Iran comes five years after a flawed NIE concluded neighboring Iraq was developing weapons of mass destruction -- a report that helped pave the way for the U.S.-led invasion in March 2003.

No nuclear, chemical or biological weapons were ever found in Iraq and intelligence agencies since have been more cautious about Iran’s nuclear ambitions.

Bush and Vice President Dick Cheney, who have repeatedly accused Iran of seeking nuclear weapons, were briefed on the new NIE last Wednesday.

Washington, which insists it wants to solve the Iran problem diplomatically while leaving military options “on the table,” is pushing for tougher U.N. sanctions against Tehran but faces resistance from China and Russia.

Iran insists it wants nuclear technology only for civilian purposes, such as electricity generation.

The nuclear standoff has become a major issue in the 2008 U.S. presidential campaign, with candidates weighing in on the prospects for military action against Iran.

U.S. STILL SEES IRANIAN “RISK”

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Senate Majority Leader Harry Reid, among senior Democrats who had requested the updated report on Iran, said the assessment challenged some of the administration’s “alarming rhetoric about the threat posed by Iran.”

He and other critics had accused Bush trying to rush the country into war again based on faulty intelligence.

Bush’s national security adviser said that on balance the report was “good news,” insisting it showed Tehran was susceptible to international pressure but that the risk of it acquiring nuclear weapons “remains a very serious problem.”

But he added: “The international community has to understand that if we want to avoid a situation where we either have to accept Iran on a road to a nuclear weapon ... or the possibility of having to use force to stop it with all the connotations of World War III, then we need to step up the diplomacy, step up the pressure.”

Administration officials denied the new NIE had exposed a serious intelligence lapse but could not explain how agencies failed to detect for four years that Iran’s nuclear weapons program had been halted.

Intelligence officials said the suspension involved design and engineering for a bomb and covert uranium-conversion work.

A key NIE finding was that: “Tehran’s decision to halt its nuclear weapons program suggests it is less determined to develop nuclear weapons than we have been judging since 2005.”

Still, the report said: “We also assess with moderate-to-high confidence that Tehran at a minimum is keeping open the option to develop nuclear weapons.”