By Fredrik Dahl and Justyna Pawlak
VIENNA/BRUSSELS (Reuters) - Iran has halted its most sensitive nuclear activity under a preliminary deal with world powers, winning some relief from economic sanctions on Monday in a ground-breaking exchange that could ease the threat of new war in the Middle East.
The United States and European Union both announced they were suspending some trade restrictions against the OPEC oil producer after the United Nations' nuclear watchdog confirmed that Iran had met its end of the November 24 agreement.
Tehran is expecting to be able to retrieve $4.2 billion in oil revenues frozen overseas and to resume trade in petrochemicals, gold and other precious metals.
The mutual concessions are scheduled to last six months, during which time six powers - the United States, Russia, China, France, Britain and Germany - aim to negotiate a final accord defining the scope of Iran's nuclear activity.
Western governments want to lay to rest their concerns that Iran could produce an atomic weapon and to end decades of hostility with Tehran that goes back to the Islamic revolution of 1979. Iran wants an end to painful U.S. and EU trade and financial sanctions that have severely damaged its economy.
The interim accord, struck after years of on-off diplomacy, marks the first time in a decade that Tehran has limited its nuclear operations, which it says have no military goals, and the first time the West has eased economic pressure on Iran.
"This is an important first step, but more work will be needed to fully address the international community's concerns regarding the exclusively peaceful nature of the Iranian nuclear program," the EU's foreign policy chief Catherine Ashton said.
"The iceberg of sanctions against Iran is melting," the head of Iran's Atomic Energy Organization, Ali Akbar Salehi, told Iranian state television.
The breakthrough is widely seen as a result in part of the election of Hassan Rouhani, a relative moderate, as Iran's president last year. Rouhani is expected to court global business this week at the World Economic Forum in Davos, although any future trade bonanza depends on the long-term success of nuclear diplomacy.
Israel, which has warned it might take military action, with or without U.S. backing, to prevent Iran developing nuclear arms, has called the deal a "historic mistake" that fails to ensure Tehran cannot build a bomb in secret.
Ashton, who coordinates diplomatic contacts with Iran on behalf of the six powers, said she expected talks on the final settlement to start in February.
In Washington, the State Department said those negotiations would be complex and the United States was "clear-eyed" about the difficulties ahead. Meanwhile, the White House said, the "aggressive enforcement" of remaining sanctions would continue.
IAEA REPORTING PROGRESS
Under the interim deal, Iran agreed to suspend enrichment of uranium to a fissile concentration of 20 percent, a short technical step away from the level needed for nuclear weapons.
It also has to dilute or convert its stockpile of this higher-grade uranium, and cease work on the Arak heavy water reactor, which could provide plutonium, an alternative to uranium for bombs.
The IAEA said Tehran had begun the dilution process and that enrichment of uranium to 20 percent had been stopped at the two facilities where such work is done.
"The Agency confirms that, as of January 20, 2014, Iran ... has ceased enriching uranium above 5 percent U-235 at the two cascades at the Pilot Fuel Enrichment Plant (PFEP) and four cascades at the Fordow Fuel Enrichment Plant (FFEP) previously used for this purpose," its report to member states said.
It was referring to Iran's two enrichment plants, at Natanz and Fordow. Cascades are linked networks of centrifuge machines that spin uranium gas to increase the concentration of U-235, the isotope used in nuclear fission chain reactions, which is found in nature at concentrations of less than 1 percent.
The U.S. government estimates the value to Iran of sanctions relief at about $7 billion in total, although some diplomats say much will depend on the extent to which Western companies will now seek to re-enter the Iranian market.
The deal was reached after months of secret negotiations between Washington and Tehran, and marks a new thaw in relations between the United States and Iran.
British Foreign Secretary William Hague warned, however, that Western governments will be vigilant in implementing remaining sanctions: "It's important that other sanctions are maintained and that pressure is maintained for a comprehensive and final settlement of the Iranian nuclear issue," he said.
Washington has made clear its view that it is premature for industry to start doing business with Iran again as most of the sanctions remain in place for now.
DOUBTS
The preliminary deal does dampen talk of war: the United States and Israel had both refused to rule out military action against Iranian nuclear sites if the matter could not be resolved by diplomacy.
But Israel, which is believed to have the Middle East's only nuclear arsenal and views a nuclear-armed Iran as an existential threat, has branded the deal a "historic mistake" as it does not dismantle Tehran's uranium enrichment program.
Its allies in the U.S. Congress have threatened to impose new sanctions on Iran, even though President Barack Obama has urged them to give diplomacy a chance.
Mark Dubowitz, head of the Foundation for Defense of Democracies in Washington and a proponent of tough sanctions on Iran, said that by providing economic relief, the West will lose future bargaining power.
"The interim deal does nothing over the next 12 months to prevent Iran from proceeding with the nuclear-weapon and ballistic-missile research that are the keys to a deliverable nuclear weapon," he said. "Ahead of final negotiations, Tehran will be in a stronger position to block peaceful Western efforts to dismantle its military-nuclear program."
The U.N. nuclear watchdog will play a key role in checking that Iran implements the deal, but its increased access falls short of what it says it needs to investigate suspicions that Tehran may have worked on designing an atomic bomb in the past.
"The accord gives the powers and Iran plenty of flexibility in going about reducing Iran's nuclear threat to a level the world will accept," said proliferation expert Mark Hibbs of the Carnegie Endowment think-tank. "But it hasn't spelled out how they will work with the IAEA to resolve allegations Iran has been working on nuclear weapons."
(Additional reporting by Parisa Hafezi in Ankara, Lesley Wroughton, Jeff Mason and Steve Holland in Washingon and Adrian Croft in Brussels; Writing by Justyna Pawlak; Editing by Peter Graff and Alastair Macdonald)