(Reuters) - Iran is still relying on old technology to expand its nuclear program, in what may be a sign it is having difficulties developing modern machines that could speed up production of potential bomb material.

A report by the U.N. nuclear watchdog last week said Iran was significantly stepping up its uranium enrichment, a finding that sent oil prices higher on fears tensions between with the West could escalate into military conflict.

Israel has threatened to launch pre-emptive strikes to prevent Iran getting the bomb and Defense Minister Ehud Barak has said Tehran´s continued technological progress mean it could soon pass into a "zone of immunity," suggesting time was running out for an effective military intervention.

But, contrary to some Western media reports in the run-up to Friday´s International Atomic Energy Agency report, Iran does not yet seem ready to deploy advanced enrichment equipment for large-scale production, despite years of testing.

Instead, the IAEA document showed Iran was preparing to install thousands more centrifuges based on an erratic and outdated design, both in its main enrichment plant at Natanz and in a smaller facility at Fordow buried deep underground.

"It appears that they are still struggling with the advanced centrifuges," said Olli Heinonen, a former chief nuclear inspector for the Vienna-based U.N. agency.

"We do not know whether the reasons for delays are lack of raw materials or design problems," he said.

Iran says it is refining uranium to fuel a planned network of nuclear power plants so that it can export more of its oil and gas. The United States and its allies accuse it of a covert bid to acquire nuclear weapons capability.

Tehran often trumpets technical advances in its nuclear program, including the development of new centrifuges - machines that spin at supersonic speed to increase the concentration of the fissile material in uranium.

In mid-February, President Mahmoud Ahmadinejad said Iran now had a "fourth generation" centrifuge that could refine uranium three times faster than previously.

"Iran unveiled a third-generation model two years ago and then never said more about it," said Mark Fitzpatrick of the International Institute for Strategic Studies think tank.

"Now it says it has a fourth-generation model, which is probably a variation of the problematic second-generation machines."

MILLION DOLLAR QUESTION

The IAEA, which regularly inspects Iran´s declared nuclear sites, has little access to facilities where centrifuges are assembled and the agency´s knowledge of possible centrifuge progress is mainly limited to what it can observe at Natanz.

Asked whether Iran may keep more advanced centrifuges at a location which U.N. inspectors were not aware of, an official familiar with the issue said: "That is, of course, the million dollar question."

If Iran eventually succeeded in introducing the newer models for production, it could significantly shorten the time needed to stockpile enriched uranium, which can generate electricity or, if processed much further, nuclear explosions.

But it is unclear whether Tehran, subject to increasingly strict international sanctions, has the means and components to make the more sophisticated machines in bigger numbers.

"Iran has been testing its second-generation models for several years but they do not appear to be ready for full-scale use yet," said analyst Peter Crail of the Arms Control Association, a Washington- based research and advocacy group.

"Iran´s ability to mass produce them is also uncertain."

The U.N. Security Council has long called on Iran to suspend uranium enrichment and Tehran´s failure to comply has earned it four rounds of sanctions, as well much tougher U.S. and European Union measures that take direct aim at its biggest export, oil.

Western experts say Iran´s stockpile of low-enriched uranium could be enough for about four atomic bombs if refined much more, should the Iranian leadership decide to do so.

"CRACK THE CODE"

Iran has for years been trying to develop centrifuges with several times the capacity of the 1970s-vintage, IR-1 version it now uses for the most sensitive part of its atomic activities.

Marking a potential step forward, Iran last year started installing larger numbers of more modern IR-4 and IR-2m models for testing at a research and development site at the enrichment facility near the central town of Natanz.

But last week´s IAEA report suggested Iran was encountering problems testing them in interlinked networks known as cascades, said David Albright of the Institute for Science and International Security (ISIS) think tank.

"The testing of advanced-centrifuge production-scale cascades ... is going far more slowly than expected," he said in an analysis. Iran´s "advanced centrifuge program appears troubled," the ISIS report added.

The IAEA said Iran had informed it in early February of plans to install three new types of centrifuge - IR-5, IR-6 and IR-6s - as single machines at the Natanz R&D site.

When so many models are tested simultaneously, "it indicates that Iran has not yet reached a point where it can decide which would be the next generation centrifuge to be deployed," Heinonen, now at Harvard University´s Belfer Center for Science and International Affairs, said.

Fitzpatrick said: "Sooner or later Iran will probably crack the code on advanced centrifuges and introduce them in larger numbers, but so far that hasn´t been possible." (Editing by Robin Pomeroy) (© Thomson Reuters 2012. 02/27/12)