Iran's top nuclear negotiator Ali Larijani said in Tehran Sunday that mounting pressure on Iran to stop making nuclear fuel amounted to "bullying" and warned that taking the matter to the Security Council for possible sanctions against the Islamic Republic would be a "mistake."

The report Friday by the UN watchdog International Atomic Energy Agency (IAEA) documents Iranian resumption of conversion, the first step in making the enriched uranium that can be reactor fuel or bomb material.

The report also outlines Iranian failures in a now two-and-a-half year-old IAEA investigation to clear up safeguards issues under the nuclear Non-Proliferation Treaty (NPT) that concern work with both uranium and plutonium, the two raw materials for making atom bombs.

IAEA chief Mohamed ElBaradei has said the "jury is still out" on whether Iran is secretly developing nuclear weapons, as the United States claims. Iran says its nuclear program is a peaceful effort to generate electricity.

The IAEA had on August 11 called on Iran to suspend the fuel work as a condition for resuming talks with the EU on guaranteeing that the Iranian program is peaceful. It also called for the report on Iranian compliance to be filed.

A European diplomat told AFP "the next two weeks" ahead of an IAEA board of governors meeting on September 19 would be focused on getting Iran to halt the uranium conversion work but that if Tehran did not do this by then, "the right thing to do is to involve the Security Council.".

A senior US diplomat said that "unless Iran stops its conversion, cooperates with the IAEA and returns to the negotiating table, the board should report this matter to the UN Security Council."

Non-proliferation expert David Albright, a former UN weapons inspector, said the report gives the United States and Europe ammunition for referral.

He said the some seven tons of uranium gas Iran has made to be ready for enrichment, according to the IAEA report, was "more than enough to make one nuclear bomb."

The European diplomat said there is room for another round of diplomacy at a UN summit in New York September 14-16, which the new hardline Iranian President Mahmoud Ahmadinejad will attend.

Diplomats warn that taking Tehran to the Security Council for possible sanctions is not a magic solution.

They say oil giant Iran is in a stronger position than when the crisis started two years ago as the United States is bogged down militarily in Iraq and oil prices are skyrocketing.

Iran meanwhile is trying to split the international community by calling for other nations beyond the three EU negotiators Britain, Germany and France to take part in talks.

But a senior diplomat from one of the EU3 states said the Iranian tactic would not work.

"First they tried to play the EU and the United States off against each other, which didn't work. Then they tried to play the EU3 countries off against each other but we maintained a solid front.

"Now they are cynically trying to play the members of the IAEA board against each other. I think the IAEA board members recognize that."

A Western diplomat said: "Iran is welcome to talk to any countries it wants, but the United States, EU, Russia, Japan, Canada and others would not accept the efficacy of any agreement reached between Iran and other negotiating partners" than the EU3.

And as for fears that Russia and China, two countries with extensive economic dealings with Iran, would block Security Council sanctions or even taking the matter to the Council, the European diplomat said the Council would adopt a "very measured, gradual and, above all, constructive approach.

"It is not going to punish Iran (immediately with sanctions) but reinforce the efforts of the IAEA," with what at first would be a statement by the Council president urging Iran to comply with the IAEA demands about stopping fuel work.