TEHRAN (Reuters) – Iran says it will start producing higher-grade nuclear fuel on Tuesday and plans a major expansion of its uranium enrichment program by building 10 new plants in the next year, further stoking tensions with the West.

The statement by Iran’s nuclear agency chief Ali Akbar Salehi on Sunday evening came after President Mahmoud Ahmadinejad earlier in the day instructed him to start work on producing atomic fuel for a Tehran research reactor.

Iran’s announcement raised the stakes in its dispute with the West, although analysts doubted Iran could launch 10 new plants in the near future since U.N. sanctions imposed on Tehran make it harder for it to obtain sophisticated components.

Analysts believe Tehran’s announcement that it will start producing higher-refined uranium may be a negotiating tactic to prod the West into closing a fuel deal largely on Iranian terms.

But the move could also backfire if it only serves to make Western powers increasingly determined to push for more sanctions against Iran, the world’s fifth-largest oil producer, over its refusal to suspend enrichment.

“Iran will set up 10 uranium enrichment centers next year,” Iran’s Arabic-language television station al Alam quoted Salehi as saying. The Iranian year starts on March 21. Iran mooted such a plan late last year but gave no time frame.

Ahmadinejad also said talks could still be revived on a nuclear fuel exchange offer by world powers designed to allay fears the Islamic Republic is trying to develop atomic bombs.

Salehi said Iran would start to raise the enrichment level from 3.5 percent to 20 percent on Tuesday, in the presence of inspectors from the International Atomic Energy Agency (IAEA).

He said Iran would formally notify the Vienna-based U.N. watchdog about the move in a letter on Monday, al Alam reported. He earlier said production would take place at the Natanz site.

But Salehi also suggested production would be halted if Iran could import fuel enriched to 20 percent, the degree of purity required for conversion into special fuel needed to run a Tehran nuclear medicine reactor, Iran’s stated goal for the move.

Tehran has also voiced readiness to send low-enriched uranium (LEU) abroad in a swap for fuel for the reactor, due to run out of it later this year. But amendments Iran has demanded to the U.N.-drafted proposal have been rejected by the United States, France and Russia, the other parties to the plan.

“Iran would halt its enrichment process for the Tehran research reactor any time it receives the necessary fuel for it,” Salehi said.

IRAN’S MOVE MAY BACKFIRE, PROVOKE MORE SANCTIONS

Ahmadinejad’s contradictory signals over the last week — first expressing readiness to send low-enriched uranium abroad and then announcing that Iran would start producing 20 percent fuel itself — may also be a sign of Iran’s political turmoil.

Analysts believe Ahmadinejad may want to secure a swap deal with the international community to boost his standing and legitimacy after last year’s disputed election, but is hampered by political rivals who oppose any LEU export as a threat to national security.

Iran’s move to make 20 percent fuel itself may stoke suspicion that its real aim is higher-enriched uranium for atom bombs, since only France and Argentina — not Iran — are known to have the technology to yield fuel for medical isotopes.

A senior diplomat close to the IAEA said enrichment to 20 percent was legal under Iran’s non-proliferation accord with the agency. “But what counts is design verification (the inspectors do). Higher enrichment means higher verification requirements.”

“Natanz would need less than a few months to start making the 20 percent enriched uranium, (although) Iran will face significant technical hurdles in manufacturing it,” said David Albright, head of the Institute for Science and International Security, a think-tank that tracks nuclear proliferation.

“The larger technical issue is whether Iran is planning to make only the small amount of enriched uranium needed for its research reactor, or is it trying to convert most of its 3.5 percent stock of enriched uranium into 20 percent material.

By doing so, it would be going most of the rest of the way to weapon-grade uranium,” Albright told Reuters.

Western powers fear Iran’s nuclear programme is aimed at developing nuclear weapons capability with high-enriched uranium. Tehran denies the charge, saying it wants only lower-grade nuclear material for electricity generation.

Iran in November declared plans to build 10 new enrichment plants in a vast, defiant expansion of nuclear work after the IAEA rebuked it for erecting a second plant in secret.