Iran said on Tuesday that any exchange of nuclear fuel must take place on its soil, underlining its rejection of a plan to ensure it does not amass possible atom bomb material.                                            In a letter to the International Atomic Energy Agency, its first official reply to an IAEA-brokered fuel swap proposal, Iran said it would prefer simply to buy the fuel but would accept a simultaneous exchange on its territory.                                             
That would be unacceptable to the United States and European allies, which hope to get new sanctions imposed in the coming weeks after failing to reach agreement on the fuel exchange. But China expressed reservations over sanctions again, saying greater diplomatic efforts were needed.                                            Western countries fear Iran wants to stockpile uranium to enrich it to levels that could be used for nuclear weapons. Iran says its sole aim is to run nuclear energy plants to generate electricity and produce isotopes for medicine or agriculture.                                            "In order to bring about a constructive interaction, we have declared our readiness for a fuel swap, provided it is done within the country," said Iranian foreign ministry spokesman Ramin Mehmanparast, cementing remarks by other Iranian officials.                                            "We are prepared for a fuel swap even though we do not regard this condition of supplying fuel to the Tehran research reactor through a swap as correct."                                            Washington called Iran's response a "red herring" that brought nothing new to the discussion.                                            "The Iranian counterproposal is unacceptable, as we've made clear before, and we will continue to work within the IAEA but also we will continue to consult from the international standpoint on appropriate next steps, including prospective sanctions," said US State Department spokesman PJ Crowley.                                           
Earlier this month, Iran announced a start to higher-scale enrichment that would refine uranium to 20 percent purity -- the level needed for conversion into fuel plates for its Tehran research reactor, which makes isotopes for cancer patients.                                            Iran said it was boosting enrichment itself because the West was refusing to budge from terms drawn up by the UN nuclear watchdog under which Iran would ship 70% of its low-enriched uranium abroad and wait up to a year to get reactor fuel back in exchange.                                            Iran formally stated its position on the four-month-old fuel swap plan in its letter to the IAEA. The letter, obtained by Reuters, said the Tehran reactor's fuel stock, imported from Argentina in 1993, was "approaching its end."                                             
Analysts say Iran lacks the technical means to make the reactor fuel itself and has earmarked for 20 percent enrichment a quantity of low-enriched uranium far in excess of the reactor's needs. That raised suspicions it eventually aims to enrich the material to the 90% purity suitable for warheads.                                             
The IAEA said in a report last week that Iran may now be working to develop a nuclear-armed missile, providing further grist to Western countries hoping to persuade China, which has UN Security Council veto power, to back harsher sanctions.