* Centrifuge move signals defiance ahead of talks with world powers
* U.S. says it would be "provocative step" by Tehran
* Fuel conversion could though buy time for big power diplomacy
* Iran and six powers to meet on Feb. 26 in Kazakhstan
* U.S. ready for bilateral meeting with Iran at talks (Adds U.S. ready for direct talks with Iran in Almaty, paragraphs 28-30)
By Fredrik Dahl
VIENNA, Feb 21 (Reuters) - Iran has begun installing advanced centrifuges at its main uranium enrichment plant, the U.N. nuclear watchdog said on Thursday, a defiant step that will worry Western powers ahead of a resumption of talks with Tehran next week.
In a confidential report, the International Atomic Energy Agency (IAEA) said 180 so-called IR-2m centrifuges and empty centrifuge casings had been put in place at the facility near the town of Natanz in central Iran. They were not yet operating.
If launched successfully, such machines could enable Iran to speed up significantly its accumulation of material that the West fears could be used to devise a nuclear weapon. Iran says it is refining uranium only for peaceful energy purposes.
Iran's installation of new-generation centrifuges would be "yet another provocative step," U.S. State Department spokeswoman Victoria Nuland said in Washington.
White House spokesman Jay Carney warned Iran that it would face further pressure and isolation if it failed to address international concerns about its nuclear programme in the Feb. 26 talks with world powers in the Kazakh city of Almaty.
Britain's Foreign Office said the IAEA's finding was of "serious concern". Israeli Prime Minister Benjamin Netanyahu's office said the report "proves that Iran continues to advance swiftly towards the red line" that he laid down last year.
Netanyahu, who has strongly hinted at possible military action if sanctions and diplomacy fail to halt Iran's nuclear drive, told the United Nations in September Iran must not be allowed to amass enough higher-enriched uranium to make even a single warhead.
Iran denies Western accusations that it is seeking to develop a capability to make atomic bombs. Tehran says it is Israel's assumed nuclear arsenal that threatens peace.
Iran's envoy to the IAEA, Ali Asghar Soltanieh, told Iranian media the U.N. agency's report showed "no evidence of diversion of material and nuclear activities towards military purposes."
U.S. lawmakers meanwhile are crafting a bill designed to stop the European Central Bank from handling business from the Iranian government, a U.S. congressional aide said on Thursday, in an attempt to keep Tehran from using euros to develop its nuclear programme.
In the early stages of drafting, it would target the ECB's cross-border payment system and impose U.S. economic penalties on entities that use the European Central Bank to do business with Iran's government, the aide said on condition of anonymity.
The aide disclosed the new push for sanctions ahead of fresh talks on Tuesday in which major powers hope to persuade the Iranian government to rein in its atomic activities, which the West suspects may be a cover to develop a bomb capability.
RISING WESTERN PRESSURE
It was not clear how many of the new centrifuges Iran aims to install at Natanz, which is designed for tens of thousands.
An IAEA note informing member states late last month about Iran's plans implied that it could be up to 3,000 or so.
Iran has for years been trying to develop centrifuges more efficient than the erratic 1970s IR-1 model it now uses, but their introduction for full-scale production has been dogged by delays and technical hurdles, experts and diplomats say.
The deployment of the new centrifuges underlines Iran's continued refusal to bow to Western pressure to curb its nuclear programme, and may further complicate efforts to resolve the dispute diplomatically, without a spiral into Middle East war.
Iran has also started testing two new centrifuge types, the IR-6 and IR-6s, at a research and development facility, the IAEA report said. Centrifuges spin at supersonic speed to increase the ratio of the fissile isotope in uranium.
In a more encouraging sign for the powers, however, the IAEA report said Iran in December resumed converting some of its uranium refined to a fissile concentration of 20 percent to oxide powder for the production of reactor fuel.
That helped restrain the growth of Iran's higher-grade uranium stockpile since the previous report in November, a development that could buy more time for diplomacy.
The report said Iran had increased to 167 kg (367 pounds) its stockpile of 20 percent uranium - a level it says it needs to make fuel for a Tehran research reactor but which also takes it much closer to weapons-grade material if processed further.
NEW OFFER TO IRAN
One diplomat familiar with the report said this represented a rise of about 18-19 kg since November, a notable slowdown from the previous three-month period when the stockpile jumped by nearly 50 percent after Iran halted conversion.
Israel last year gave a rough deadline of mid-2013 as the date by which Tehran could have enough higher-grade uranium to produce a single atomic bomb if processed further. Experts say about 240-250 kg of 20 percent enriched uranium would be needed.
But a resumption of conversion, experts say, means the Israeli "red line" for action could be postponed.
Refined uranium can fuel nuclear energy plants, which is Iran's stated aim, or provide the core of an atomic bomb, which the United States and Israel suspect may be its ultimate goal.
Next week's talks between the six powers and Iran to try again to break the impasse in the decade-old dispute are their first since mid-2012, but analysts expect no real progress toward defusing suspicions that Iran is seeking atomic bomb capability.
The United States, Russia, China, France, Britain and Germany - a group known as the P5+1 - want Iran to halt 20 percent enrichment and shut the Fordow underground plant where this takes place.
Iran wants them to recognise what it regards as its right to refine uranium for peaceful purpose and to relax increasingly strict sanctions battering its oil-dependent economy.
The powers plan to offer to ease sanctions that bar trade in gold and other precious metals with Iran in return for Iranian steps to shut down the nation's newly expanded Fordow uranium enrichment plant, Western officials told Reuters on Friday.
A U.S. official said the United States was ready to meet bilaterally with Iran in Almaty, something he said Tehran had not agreed to since 2009, when Iranian officials initially appeared to accept a deal on curbing the nuclear program and then backed away.
"You've heard us say repeatedly we are open to meeting bilaterally within the context of P5+1," said the official, speaking on condition of anonymity. "I fully expect we'll be ready to meet them bilaterally if they are willing. We'll see in Almaty."
In Paris, deputy foreign ministry spokesman Vincent Floreani said the powers were ready to make a new offer to Iran with "significant new elements" and that they hoped Tehran would engage seriously in the negotiations.
Iran has suggested that shutting down Fordow in exchange for a lifting of gold sanctions would not be acceptable.L6N0BI4A3] (Additional reporting by John Irish in Paris,; Zahra Hosseinian in Zurich,; Rachelle Younglai, Arshad Mohammed and Matt Spetalnick in Washington and Paul Carrel in Frankfurt; Editing by Roger Atwood and David Brunnstrom)