The U.N.'s nuclear watchdog said on Thursday Iran had failed to meet a February 21 deadline to suspend enrichment of uranium, exposing Tehran to possible new sanctions over concerns it seeks to produce an atomic bomb.

The International Atomic Energy Agency said in a report Iran had installed two cascades, or networks, of 164 centrifuges in its underground Natanz enrichment plant with another two cascades close to completion.

This amounted to an effort to escalate research-level enrichment of nuclear fuel into "industrial scale" production.

"Iran has not suspended its enrichment-related activities," said the confidential IAEA report, obtained by Reuters.

By ignoring the deadline, Tehran reaffirmed its rejection of a mid-2006 offer by six world powers of talks on trade benefits provided it halted enrichment, a process that can yield nuclear power plant fuel or bombs.

The U.N. Security Council imposed sanctions on Iran in a December 23 resolution that banned transfers of atomic technology and know-how to Iran. The resolution authorized the council to take further measures if Iran flouted the deadline.

Additional penalties might include a travel ban on senior Iranian officials and restrictions on non-nuclear business.

The Islamic Republic, which says its nuclear fuel program is designed only to produce electricity, remained defiant.

"Regarding the suspension mentioned in the report, because such a demand has no legal basis and is against international treaties, naturally, it could not be accepted by Iran," Mohammad Saeedi, deputy head of Iran's Atomic Energy Organization, told Reuters in Tehran.

He said the report showed the best way to resolve the dispute was to return to talks.

The United States, Britain and several other European nations are pushing for additional U.N. sanctions that would, as British Foreign Minister Margaret Beckett said, "lead to the further isolation of Iran internationally."

Jackie Sanders, a U.S. deputy ambassador at the United Nations, said discussions would take place in the next few days to see what measures can be taken to "ratchet up the pressure."

But council diplomats said they did not expect any meetings in New York until next week at the earliest and anticipated weeks of negotiations since harsher sanctions could face serious obstacles. Russia, China and some EU powers prefer more dialogue with Iran to Washington's push to isolate and punish.

Moscow's U.N. ambassador Vitaly Churkin questioned the usefulness of addition sanctions and stressed the need for a diplomatic solution. Churkin told reporters, "The goal is to accomplish a political outcome of this problem."

URANIUM FUEL

The report said Iranian workers lowered into the Natanz plant an 8.7-ton container of uranium hexafluoride gas (UF-6) to prepare to feed centrifuges, which purify it into power plant fuel or, if refined to high levels, material for bombs.

Iran had told the IAEA it intended to have 3,000 centrifuges, divided into 18 cascades, installed and brought "gradually into operation" by May.

The centrifuges would lay the basis for "industrial-scale" fuel production involving some 54,000 such machines.

Analysts said this was proof that Iran was speeding up the installation of the apparatus needed to enrich significant quantities of uranium to give it a stronger hand in any future negotiations with the West.

"What I would say is that it's now trying to give the impression that it can move quickly to install a large number of cascades and enrich uranium ... We'll see what happens, but I would say that they're enriching uranium faster than commonly expected," said David Albright, director at the Institute for Science and International Security.

The report also said Iran remained far away from enriching uranium in quantities suitable for use in nuclear energy plants.

A senior U.N. official familiar with IAEA operations in Iran said Tehran had produced a minute amount of the feed material.

Given quality-control problems and inexperience, Iran probably remains three to 10 years away from accumulating enough highly enriched uranium for the core of atom bombs -- assuming it wants them, intelligence estimates and independent analysts say.

The report provided no significant answers to long-outstanding IAEA questions about the nature of Iran's program, such as mysterious traces of bomb-grade uranium and suspected military involvement in enrichment research.