This step is almost certain to raise concern about Iran's intentions at a time when the international community is calling on the Islamic Republic to fully cooperate on answering charges it is hiding a program to develop nuclear weapons, the diplomats said.
"Iran is to announce soon that it will be beginning work in June on a heavy water research reactor in Arak," 200 kilometres (120 miles) southwest of Tehran, a diplomat close to the Vienna-based International Atomic Energy Agency (IAEA) said.
IAEA director general Mohamed ElBaradei returned to Vienna Wednesday from Tehran, where he had hammered out an agreement for Iran to adhere to a timetable to answer the agency's questions about its nuclear activities.
The reactor to be built at Arak would not be in violation of safeguards which the IAEA enforces under the nuclear Non-Proliferation Treaty (NPT), the diplomat said. Iran has been saying since July that it wants to build such a reactor.
But another diplomat said going ahead with the reactor now could send the wrong political signal.
"This is not an accident," the diplomat said, referring to the fact that construction is to begin in June, the same month the IAEA will hold a board of governors meeting on Iran.
He said the Iranian government wanted to assert its independence, as it claims it has the right to make nuclear fuel, and also had to appease hardliners at home who object to yielding to IAEA demands.
Iran has said the Arak reactor would be for research and the production of radioisotopes for medical and industrial use.
Iran told the IAEA, according to an agency report in November, that "it had tried to acquire a reactor from abroad to replace" a 30-year-old research reactor in Tehran.
The first diplomat said the reactor, which is to have thermal power of 40 megawatts, could produce enough fuel to make "more than one significant quantity of plutonium per year," a "significant quantity" referring to the amount needed to make an atomic bomb.
But due to US and other Western nations' sanctions, Iran was not able to buy a new reactor, and so wanted to build one of its own which could use domestically produced fuel such as uranium dioxide.
The diplomat said, however, that the heavy water reactor could produce depleted uranium which could then be reprocessed into plutonium, for instance in so-called hot cells that would be also used to make radio-isotopes.
It is this connection, at a time when the United States is raising alarms about Iran's possible nuclear weapons potential, that the IAEA would like Iran to desist from starting work on the reactor, even if in June the Iranians would only begin digging the hole for the building.
"Once they have started to build it, it's as if it exists," he said, referring to problems the international community has already had with Iran's resumption in March of uranium conversion, another part of the nuclear fuel cycle that is not forbidden by NPT safeguards but which raises concerns.
Such technically legal activites could damage confidence Iran is doing everything necessary to prove it is not secretly developing nuclear weapons, diplomats said.
"It's still something that can be fixed, namely by putting another type of reactor at Arak and giving them the fuel for it," the diplomat said.
But he said this depended on Iran cleaning up the IAEA's questions about its nuclear program.
Last October, Iran gave the IAEA what it said was a complete declaration of its nuclear activities.
It was later found to have made a number of omissions, including its acquisition of designs for sophisticated P-2 centrifuges that can produce weapons-grade uranium, way above the normal level of enrichment required for atomic reactors.
Iranian Foreign Minister Kamal Kharazi said Tuesday that Iran expected the IAEA investigation to end in June, although IAEA officials said the matter would probably go until the end of the year at least.
If Iran is judged to have failed to meet IAEA demands, the IAEA board could declare the country in breach of the NPT and refer the matter to the matter to the UN Security Council, which could choose to impose sweeping UN sanctions.