Iran had insisted earlier Friday that it was honoring a pledge to freeze uranium enrichment, but remained at odds with European countries by demanding that key equipment should be exempted from the deal.

Iran now appears to have yielded to demands from Britain, France and Germany to drop its request for 20 centrifuges to be exempted from the uranium enrichment agreement.

"There are ongoing discussions with Iran and Europe. We understand that they are close to an agreement but there are still final communications to take place," International Atomic Energy Agency spokesman Mark Gwozdecky told reporters.

Iranian delegation chief in Vienna Hossein Moussavian told AFP that Iran's yielding on the 20 centrifuges is "an open issue that is not yet decided."

He said Tehran must let the IAEA know in a letter what it is doing "and the decision on that will be made later tonight (Friday) or tomorrow (Saturday)."

Centrifuges are used in the process of enriching uranium which can then be used to generate electricity, or at higher levels make a nuclear bomb. The United States charges that Iran is secretly developing nuclear weapons but Tehran says its atomic program is a peaceful one for producing electricity.

The IAEA, which has documented almost two decades of hidden nuclear activities by Iran, has the power to report Tehran to the UN Security Council, which could impose sweeping economic sanctions on the Islamic Republic.

But Iran wants verification of its nuclear activities to remain in the framework of the IAEA and not risk being taken to the UN Security Council.

Gwozdecky said the IAEA's 35-nation board of governors, which has been meeting in Vienna since Thursday, would reconvene Saturday if there was an agreement, or Monday if there was not.

But he said "there is a sense of optimism in the room that we are very, very close to a deal."

Once the centrifuge row is resolved, Britain, France and German would submit a resolution on Iran's program which they have been negotiating with the board.

Under the accord agreed with Britain, France and German earlier this month, Iran said it would suspend nuclear activities in a show of good faith to prove that its nuclear program was solely for peaceful ends.

But IAEA director Mohamed ElBaradei said Thursday Iran has so far failed to meet that pledge as it wants to keep 20 centrifuges in use for research purposes.

The European Union is refusing to table its resolution designed to resolve the issue at the IAEA meeting until Tehran complies fully with the freeze, diplomats said.

Moussavian said the issue of the centrifuges was "just a technical issue under discussion with the IAEA and the EU."

He said Iran had already, as documented in an IAEA report in June, kept 10 centrifuges from being sealed "in order to allow ongoing R and D (research and development) work at Kalaye Electric Company (in Tehran) and Natanz.

"We don't concede this is an important issue," Moussavian said.

The IAEA has been putting seals on more than 500 centrifuges, making them inoperable, but 20 centrifuges have remained unsealed.

A European diplomat close to the negotiations said the Iranians were using the centrifuges "as a bargaining chip" in order to wrest concessions on the resolution to go before the IAEA.

A Western diplomat said the United States was ready to accept the resolution if Iran gave up all its centrifuges.

Iran had Thursday rejected as a hidden trigger a version of the text which said ElBaradei should "continue verifying that the suspension remains in place and to report without delay to the (IAEA) board should the agency find that the suspension is not fully sustained," according to a copy obtained by AFP.

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