By Justyna Pawlak and Fredrik Dahl
GENEVA (Reuters) - World powers will seek to hammer out a breakthrough deal with Iran to start resolving a decade-old dispute over its nuclear program in two-day talks that begin on Thursday, although both sides say an agreement is far from certain.
The United States and its allies say they are encouraged by Tehran's shift to friendlier rhetoric after years of hostility since the June election of President Hassan Rouhani, who has pledged to repair ties with the West and win sanctions relief.
But they stress Iran needs to back its words with action and take concrete steps to scale back its atomic work, which they suspect has covert military aims, a charge Tehran denies.
"What we're looking for is a first phase, a first step, an initial understanding that stops Iran's nuclear program from moving forward and rolls it back for the first time in decades," a senior U.S. official told reporters on the eve of the talks.
That would help buy time needed for Iran and the six powers - the United States, Russia, China, France, Britain and Germany - to reach a broader diplomatic settlement in a dispute that could otherwise plunge the Middle East into a new war.
The six nations want Iran to suspend its most sensitive uranium enrichment efforts, reduce its stockpile of such material and diminish its capacity to produce it in the future.
In return for any concessions, Iran wants the powers to lift painful economic sanctions that have slashed its daily oil sales revenues by 60 percent in the past two years and devalued its rial currency by more than half.
Iranian Foreign Minister Mohammad Javad Zarif told French daily Le Monde a deal was "not that far off," although it might not be struck at the talks in Thursday and Friday in Geneva.
"We can conclude (a deal) this week in Geneva, and if that's not the case, it's not a disaster, as long as things are moving forward," he was quoted as saying.
TALKS ENTER 'SERIOUS PHASE'
The exact contours of a potential first step in the elusive deal were unclear, but the six nations are unlikely to agree on anything less than a suspension of enrichment of uranium to 20 percent fissile purity, a level that constitutes a major advance on the way to making weapons.
"The nuclear talks are complex and have entered a serious phase," said Michael Mann, spokesman for European Union foreign policy chief Catherine Ashton, who oversees the talks with Iran on behalf of the powers. "We have to make concrete progress."
The U.S. official said that Iran at this stage must address key aspects of its nuclear program, including sufficient international monitoring. Iran's construction of a research reactor near the town of Arak is also a growing concern for the West because it could yield plutonium for bombs.
"We're looking for ways to put additional time on the clock," the administration official added.
A senior aide to a U.S. senator briefed by the White House and State Department said Washington would offer to work with Iran in a six-month confidence-building period. During that time, Washington would offer Tehran relaxed restrictions on Iran's funds held in overseas accounts. The Obama administration could also ease sanctions on trade in gold and petrochemicals.
In exchange, Iran would stop enriching uranium to 20 percent and convert its existing stockpile of 20 percent uranium to an oxide form suitable for processing into reactor fuel and take other measures to slow the program.
The aide said the concessions being sought would "neither freeze nor set back" Iran's nuclear program and that the Senate would have to act immediately to impose further sanctions on Iran.
The House of Representatives overwhelmingly passed a new sanctions bill in July that seeks to reduce Iran's oil exports to a trickle in a year. The Senate's banking panel had been expected to introduce its version of the bill in September, but the Obama administration has pushed it to delay the new legislation in order to give the Geneva talks a chance.
Another diplomat from the six nations said any agreement reached in Geneva could address some of the international concerns, but not all, leaving other issues to be discussed in future rounds of talks.
"What could be possible is a concrete agreement on a concrete step. But I cannot judge the scope of the step. It is difficult to judge it," the diplomat said.
Western diplomats are hesitant to divulge specifics about the negotiations due to sensitivities involved - both in Tehran, where conservative hardliners are skeptical about striking deals that could curtail the nuclear program, and in Washington, where hawks oppose a precipitate easing of sanctions.
ISRAEL SEES 'BAD DEAL'
An Israeli official said on Wednesday that the six powers and Iran were expected to discuss in Geneva a deal that would fall far short of Israeli expectations.
"We have learned in the last few hours that tomorrow at the ... talks in Geneva, a proposal will be examined under which Iran will cease enrichment at 20 percent and they will slow down the activity at the heavy water reactor at Arak, in exchange for which they will get sanctions relief," the official said.
"From Israel's point of view, this is a very bad deal, and we will strongly oppose these proposals."
Widely assumed to be the Middle East's only nuclear power, Israel views Iran as an existential threat and has warned it could launch pre-emptive strikes against Iranian nuclear sites if diplomacy fails to stop the program.
Tehran says it needs nuclear energy for electricity generation and medical purposes.
In a sign of potential progress, a Vienna-based envoy said U.N. nuclear chief Yukiya Amano was likely to travel to Tehran on Monday for a possible agreement with Iran on some "first steps" towards greater transparency, including regarding design information about nuclear facilities.
The International Atomic Energy Agency, which is pursuing separate negotiations with Iran, confirmed on Monday that Amano had been invited and that the issue was "being considered".
Diplomats say he would probably only go if he was confident that a deal would be struck.
(Reporting by Justyna Pawlak; Additional reporting by Patricia Zengerle and Timothy Gardner in Washington; Editing by Will Waterman and Peter Cooney)