Tensions with U.S. remained high following comments by VP Dick Cheney and Sec. State Condoleezza Rice identifying Iran as key trouble spot and publication of New Yorker magazine article claiming Pentagon already preparing for possible war by deploying special forces inside Iran to identify suspected WMD facilities; denied by U.S. Talks continued with EU-3 at IAEA in Vienna in effort to reach deal on cessation of Iranian nuclear enrichment activities in exchange for political and economic incentives. EU-3 reportedly told Iran they would settle for nothing less than complete halt to enrichment program.

Foreign Minister Kamal Kharrazi said 14 December Iran would accept U.S. involvement in nuclear talks provided Washington treated it as equal partner. Conciliatory comments came day after EU-3 (Britain, France and Germany) opened new talks with Iran aimed at reaching long-term agreement on Tehran’s nuclear activities.

Iran and EU-3 (France, UK, and Germany) signed agreement on nuclear standoff, with Iran pledging comprehensive but temporary suspension of uranium enrichment and EU offering economic rewards. Deal prevented issue from being referred to UN Security Council during crucial IAEA meeting 29 November, which issued softly-worded resolution welcoming enrichment freeze. But Iranian insistence that suspension will last only few months (pending outcome of negotiations with EU-3) and strong doubts in Washington that Iran negotiating in good faith likely to bring issue to head in near future.

France, Germany and Britain offered package of economic incentives to Iran, including access to nuclear fuel, in exchange for suspension of uranium enrichment. Tehran gave mixed signals as to whether would consider deal. Outright rejection would likely lead EU to support U.S. call to refer matter to UN Security Council at 25 November IAEA meeting. Ongoing negotiations could buy Tehran sufficient time to sound out new U.S. administration before taking decision.

IAEA set 25 November deadline for Iran to give full account of nuclear program and end uranium enrichment. Iran rejected IAEA call for enrichment suspension, saying it had right to peaceful nuclear program and would consider withdrawing from Nuclear Non-Proliferation Treaty if issue referred to UN Security Council. Tehran’s growing public defiance raised fears of showdown, as U.S., Israel – and increasingly, Britain, France, and Germany – called for hard line in negotiations. Iran warned Israel against targeting its nuclear facilities after announcement latter to purchase 500 “bunker-busting” bombs from U.S.

Tehran said new IAEA report – expected in coming days – would clear up outstanding issues surrounding its nuclear program, while President Mohammad Khatami promised “guarantees” Iran would not seek nuclear weapons. But U.S., EU, and Israel remain concerned over program’s extent and purpose. Iran successfully test-fired upgraded Shahab-3 ballistic missile following recent Israeli test of Arrow II anti-missile system. Several people reportedly arrested in Iran for spying on nuclear program.

Tehran restarted construction and assembly of nuclear centrifuges, following through on threat made after critical June IAEA resolution. Paris meeting 29 July between Iran and France, Germany, and Britain failed to resolve differences - U.S. Sec. State Colin Powell said matter increasingly likely to be referred to UN Security Council. Iraqi interim government expressed growing concern Iranian agents infiltrating country to undermine democratisation. U.S. 9/11 Commission report indirectly linked Iran to hijackers, saying some crossed into Iran from Afghanistan. Canada rejected acquittal of Iranian intelligence officer accused of murdering Iranian-Canadian journalist while in police custody, and recalled ambassador.

Tehran said would resume construction of centrifuges for nuclear program, after strongly worded International Atomic Energy Agency statement drafted by Britain, France and Germany “deplored” gaps in Iran’s cooperation. Situation becoming increasingly serious: U.S. seeking to establish timetable leading to possible UN Security Council action.

Tehran submitted second "complete" dossier to International Atomic Energy Agency (IAEA) 21 May, stating, as with first submission October 2003, that dossier was full account of its past and present nuclear programs. But report to be submitted by IAEA president Mohammed ElBaradei says numerous questions remain - progress unlikely before IAEA's 14 June board meeting. Tehran saw large demonstrations protesting U.S. actions in Iraq, especially in Shiite holy cities of Najaf and Karbala.

Despite renewed pledge 6 April to stop building and assembling centrifuges for uranium enrichment, international community increasingly suspicious that Tehran less than forthcoming with inspections and secretly building bomb.