VIENNA, Austria - The UN nuclear monitor reported notable advances in Iran's uranium enrichment program Wednesday while warning for the first time that its knowledge of the country's nuclear activities was shrinking.

Machines use yellow cake to produce uranium hexafluoride (UF6) at the Iranian uranium conversion facilities (UCF) in February 2007. [Agencies]

The International Atomic Energy Agency's findings, while not surprising, set the stage for possible new UN sanctions - the third set of penalties since December.

The report by IAEA chief Mohamed ElBaradei expressed the agency's concern about its "deteriorating" understanding of unexplored aspects of Iran's nuclear program.

That finding reflected frustration with the results of a four-year IAEA investigation opened after revelations that Iran for nearly two decades had been clandestinely developing enrichment and other nuclear activities that could be used to make weapons.

A senior UN diplomat, who spoke on condition of anonymity because he was not authorized to publicly comment on the report, suggested the shrinking hole left for inspections by Iran's rollback of previous monitoring agreements was potentially as worrying as its refusal to suspend uranium enrichment.

In Washington, Undersecretary of State Nicholas Burns said the report showed "Iran is thumbing its nose at the international community."

Gregory L. Schulte, the chief US delegate to the IAEA in Vienna, asked: "How can the world believe Iran's claims that its pursuits are peaceful, if Iran's leaders increasingly withhold information and cooperation from the world's nuclear watchdog?"

In a show of American military strength, ships carrying 17,000 sailors and Marines moved into the Persian Gulf on Wednesday, just days before US-Iran talks on Iraq.

The war games - which culminate in an amphibious landing exercise in Kuwait, just a few miles from Iran - appeared to be a clear warning to Iran ahead of the talks and possible UN sanctions.

"The Americans are sending a message to Iran that they are not coming to the negotiating table weak, but with their military at Tehran's doorstep," said Mustafa Alani of the Dubai-based Gulf Research Center.

Ali Ashgar Soltanieh, Iran's chief IAEA representative, suggested Washington and its allies on the UN Security Council - France and Britain - were at fault for any curtailment of IAEA inspection rights in his country. The three countries pushed the hardest for Security Council involvement last year in Iran's nuclear activities.

"The best advice to the few Western countries that have already deteriorated the situation is to stop their actions at the Security Council," Soltanieh told The Associated Press.

Experts from the five permanent Security Council members - the US, China, Britain, Russia and France - as well as Germany will meet by the end of May to discuss how to promote further negotiations with the Iranians, and what the Security Council could do if the talks fail, China's deputy UN ambassador Liu Zhenmin said at UN headquarters in New York.

Some diplomats said any action could be delayed until after the June 6-8 summit of the Group of Eight major industrialized nations.

Mohammad Saeedi, deputy head of Iran's Atomic Energy organization, defended his country's decision to limit IAEA inspections in response to stepped up UN sanctions.

"It is right of any country to suspend part of its commitments because of a lack of realization of its own rights," state IRNA news agency quoted Saeedi as saying.

The brevity of the four-page report indirectly reflected the lack of progress agency inspectors had made in clearing up unresolved issues, some of them stretching back for years.

Among them were: Iran's possession of diagrams showing how to form uranium into warhead form; unexplained uranium contamination at a research facility linked to the military; information on high explosives experiments that could be used in a nuclear program, and the design of a missile re-entry vehicle.

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