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Iran responded to a deal drawn up by the International Atomic Energy Agency (IAEA) with the demand to receive fresh nuclear fuel for its nuclear reactor before sending uranium aboard, diplomats said on Friday.

In what the International Atomic Energy Agency has described as an initial response to an IAEA-drafted nuclear fuel proposal, Western diplomats said on condition of anonymity that major Western powers found the Iranian demand for immediate access to fresh atomic fuel unacceptable.

The deal, drawn up by the IAEA, would involve Iran sending potential nuclear fuel abroad for processing to allay Western concerns that it is trying to develop nuclear weapons.

The diplomats said it was unclear whether the proposal was a serious one or if the Iranians were trying to drag out the negotiating process.

The press office of Iran's UN mission was not immediately available for comment. Nor was Iran's IAEA envoy in Vienna.

IAEA chief Mohamed ElBaradei, who is in New York for a series of meetings at UN headquarters, also declined to comment when asked by Reuters about Tehran's response

European Union leaders urged Iran on Friday to accept a United Nations-drafted nuclear fuel deal, saying progress would open the way to cooperation with the EU.

Iran has proposed changes to the agreement reached with the United States, France and Russia, Iranian media said on Thursday, making demands that appeared to challenge its basis.

A statement due to be issued by EU leaders at a summit in Brussels said they remained gravely concerned about Iran's nuclear programme.

"The European Council also calls upon Iran to agree with the IAEA to the scheme of nuclear fuel supply for the Tehran research reactor, which would contribute to building confidence while responding to Iran's need for medical radio-isotopes," said the statement, which was obtained by Reuters.

"Progress...would pave the way for enhanced relations between the EU and Iran and open the way to mutually beneficial cooperation in the political, economic, security and technical fields."

It said the Council of EU leaders would "decide in the context of the dual-track approach on our next steps."

This is a reference to a policy proposing incentives for Iran to abandon its nuclear work, or sanctions if it does not.

Also on Friday, U.S. Secretary of State Hillary Clinton signaled that the United States would allow talks with Iran over its nuclear program to "play out" before considering fresh sanctions against Tehran.

"We are working with the IAEA (the UN International Atomic Energy Agency), with France, Russia...who are all united and showing resolve in responding to the Iranian response and seeking clarification," Clinton said in a televised interview. "So I'm going to let this process play out."

Clinton did not say under what conditions the United States would consider fresh sanctions against Iran.

The New York Times: Iran rejects UN nuclear draft deal

The New York Times reported late Thursday that Iran rejected the proposal to ship most of the country's uranium abroad for enrichment in an attempt to resolve the international standoff over its contentious nuclear program.

Iranian President Mahmoud Ahmadinejad declared on Thursday that his country was working with the West to resolve the nuclear standoff.

But a Western diplomat said Iran has rejected a U.S.-backed plan to export most of its enriched uranium, and wants instead to enrich to higher levels under the supervision of the UN - a plan that could speed up Tehran's ability to make a nuclear weapon.

The disconnect between the words of Ahmadinejad and Tehran's decision, as related by the diplomat, reflect the difficulties facing international negotiators trying to persuade Iran to give up enrichment - an activity that could be used to create fissile warhead material.

The United States and allied countries were seeking Iranian agreement to a draft plan proposed last week by International Atomic Energy Agency chief Mohamed ElBaradei at talks grouping negotiators from Iran, the United States, Russia and France.

A Western diplomat familiar with the Iran offer suggested that the Islamic Republic had rejected the main thrust of the offer - shipping out most of its stockpile - and was instead proposing to further enrich it inside Iran under IAEA supervision.

Ahmadinejad insisted his country and the West were working more tightly together on nuclear cooperation than ever before.

A senior European Union official told Israeli officials last week that Israel is not privy to the details of the exchanges between Iran and the Western countries regarding its nuclear program.

"You do not understand the extent to which you are not in the picture. You do not know how much you do not know and what is happening in Iran," he said.

Accordingly, a number of senior Israeli officials backed the European official's statements by saying that the release of the draft of an agreement with Iran caught Israel by surprise.

However, a senior official in the U.S. administration told Haaretz last Thursday that from the minute the talks began on a deal over the uranium enrichment program of Iran, Israel was updated on every detail by the United States, and was given detailed reports on the talks with the Iranians and the ongoing dialogue on a nearly daily basis.

The Prime Minister's Bureau refused to comment.

Defense Minister Ehud Barak spoke out last week against the draft agreement on Iran's nuclear program, under which most of its enriched uranium will be exported abroad for processing into a form usable in its research reactor.

"Iran received legitimization for enriching uranium for civilian purposes on its soil, contrary to the understanding that those negotiating with it have about its real plans - obtaining nuclear [weapons] capability," Barak said.

He acknowledged that the deal, if signed, would significantly reduce Iran's stock of enriched uranium, but said what is needed is a complete halt to its enrichment program.