(Reuters) - Iran has sharply stepped up its controversial uranium enrichment drive, the United Nations´ nuclear agency said Friday in a report that will further inflame Israeli fears that the Islamic Republic is pushing ahead with atomic bomb plans.

The nuclear watchdog also gave details of its mission to Tehran this week where Iran failed to respond to allegations of research relevant to developing nuclear arms - a blow to the possible resumption of diplomatic talks that could help defuse fears of a new war in the Middle East.

"The Agency continues to have serious concerns regarding possible military dimensions to Iran´s nuclear program," the International Atomic Energy Agency (IAEA) said in a quarterly report about Iran issued to its member states.

The Islamic Republic´s increase of work which can have both civilian and military purposes underlines that it has no intention of backing down in a long-running row with the West that has sparked fears of war.

U.S. crude futures extended a rally on the IAEA´s findings, which added to fears that Iran´s tensions with the West would escalate. It gained more than $2 to hit the highest intraday price in nine months.

In what would be a big expansion, Iran has increased the number of centrifuge machines enriching uranium - material which can be used to make atomic bombs if refined much further - by roughly a third since late last year, the report indicated.

Preparatory work to install thousands more centrifuges is under way, potentially shortening the time needed to make high-grade uranium for a nuclear weapons.

Tehran says its nuclear program is exclusively for civilian purposes but its refusal to curb enrichment has drawn increasingly tough sanctions on its oil exports.

Iran´s ambassador to the IAEA said the report had vindicated its position and insisted Tehran has no intention of giving up its nuclear march.

"The IAEA report indicated that all Iran´s nuclear activities are under the supervision of the agency," the semi-official Fars news agency quoted Ali Asghar Soltanieh as saying.

"It shows again that Iran´s nuclear activity is peaceful."

DUTY

Israel, which has threatened Iran with pre-emptive strikes on its nuclear sites, had no immediate comment.

Israeli Defense Minister Ehud Barak has warned that the Islamic state´s nuclear research could soon pass into what he called a "zone of immunity," protected from outside disruption.

The European Union´s foreign policy chief Catherine Ashton said the IAEA report increased concerns over the real purpose of Iran´s nuclear program.

Ashton, who represents global powers - the United States, Russia, China, Germany, France and Great Britain - in stalled talks with Iran, also urged Tehran to cooperate fully with the IAEA.

"The findings of this new IAEA report contribute to further increased concerns on the exclusively peaceful nature of the Iranian nuclear program," Ashton´s spokeswoman said.

"Iran has to address all existing concerns and to build confidence in the nature of its nuclear program."

The confidential IAEA report showed that Iran has, since November last year, tripled output of uranium refined to a level that brings it significantly closer to potential bomb material, an official familiar with the agency´s probe said.

"The concern is that they are trying to give the impression that they are putting in the capability that could much more quickly make weapon-grade uranium," nuclear proliferation expert David Albright said.

"This could all be posturing to show further defiance but unfortunately it does concern many countries about what is Iran planning." Albright added, however, that Iran seemed to have problems developing newer and more efficient centrifuges.

NUCLEAR WORK IN BUNKER

The failure of the two-day IAEA visit to Tehran this week could hamper any resumption of wider nuclear negotiations between Iran and the six world powers as the sense grows that Tehran feels it is being backed into a corner.

The IAEA team sought answers from Iran raised by a previous agency report in November which suggested it had pursued military nuclear technology. Those findings helped to precipitate the latest sanctions by the EU and United States.

Making clear the two sides had been far apart, the IAEA report said there were major differences on how to tackle the issue and that Iran had dismissed the U.N. agency´s concerns as "unfounded." No further meetings are planned.

IAEA Director General Yukiya Amano urged Iran in the report to provide "early access" to Parchin, a military site near Tehran seen as central to the agency´s investigations into possible military aspects of Iran´s nuclear work.

His agency´s report showed Iran had carried out an expansion of activities both at its main enrichment plant near the central city of Natanz and at the Fordow underground site.

Enriched uranium can be used to fuel nuclear power plants, which is Iran´s stated aim, or provide material for bombs if refined much further, which the West suspects is Tehran´s ultimate plan.

At Natanz, the IAEA report said Iran had declared that 52 cascades - each containing around 170 centrifuges - were now operating, up from 37 in November. At Fordow, about 700 centrifuges are now refining uranium to a fissile concentration of 20 percent and preparations are under way to install more.

Fordow is of particular concern for the West and Israel as Iran is shifting the most sensitive aspect of its nuclear work, 20 percent enrichment, to the site.

Estimated to be buried beneath 80 meters (265 feet) of rock and soil, it gives Iran better protection against any Israeli or U.S. military strikes.

Nuclear bombs require uranium enriched to 90 percent, but Western experts say much of the effort required to get there is already achieved once it reaches 20 percent concentration, shortening the time needed for any nuclear weapons "break-out."

The IAEA said Iran had now produced nearly 110 kg of uranium enriched to 20 percent since early 2010. Western experts say about 250 kg is needed for a nuclear weapon, although it would need to be enriched much further.

(Additional reporting by Mitra Amiri in Tehran, Tabassum Zakaria in Washington and Justyna Pawlak in Brussels; Editing by Robin Pomeroy) (© Thomson Reuters 2012. 02/24/12)