"U.S. officials are either unaware of the substance of the talks or (they are) hallucinating," Sirus Naseri, a senior member of Iran's nuclear negotiating team, told the official IRNA news agency.

Iran says it needs atomic technology to generate electricity and will never use it to make bombs, as the United States fears.

London's Sunday Times said Israel had drawn up plans for a combined air and ground attack on Iranian nuclear installations if diplomacy fails to halt Tehran's atomic program.

The newspaper said Israeli Prime Minister Ariel Sharon and his inner cabinet had given "initial authorization" for a unilateral attack at a private meeting last month.

Israel, which bombed Iraq's Osirak nuclear reactor in 1981, played down the report. Iran has said it will respond vigorously to any attack on its nuclear plants.

Washington gave practical backing for the EU's diplomatic approach Friday, offering to allow Iran to begin talks on joining the World Trade Organization (WTO) and consider letting it buy civilian airline parts if it ceased all activities that could produce fuel for nuclear power plants or atomic weapons.

Washington and the EU have warned Iran it faces referral to the U.N. Security Council, which could impose economic sanctions, if it fails to allay fears it wants the bomb.

U.S. PROPOSAL "DISRESPECTFUL"

Iran dismissed the U.S. offer as insignificant. Intelligence Minister Ali Yunesi told IRNA it was "funny and disrespectful."

"The U.S. should apologize to Iran for making this proposal," he said, going on to describe Secretary of State Condoleezza Rice as a "queen of war and violence."

Naseri said it was not clear if greater U.S. involvement in the negotiations was "helpful or an obstacle to progress."

He said the EU, which has persuaded Iran to suspend potentially weapons-related activities like uranium enrichment while the two sides try to reach a solution, was close to accepting that Iran would not give up enrichment.

Instead, Tehran has offered to give "objective guarantees" that it will not divert nuclear fuel to military uses.

"It seems the Europeans are ready to adopt a logical position," Naseri said.

Iran has refused to disclose its guarantees publicly but diplomats and analysts say it is offering to allow intrusive inspections that ensure it only enriches uranium to a low grade which would be unsuitable for weapons.

It may also be prepared to restrict its enrichment activities to a pilot project, too small to make weapons production practical, diplomats and analysts say.

Such a solution would allow Iran to save face while meeting most of the West's concerns.

So far EU officials have said the only acceptable guarantee would be for Iran to mothball its enrichment plans and rely on imported nuclear reactor fuel.

The two sides are due to hold a crucial meeting in Paris on March 23 to review their talks.

"If the policy of the United States and Europe is for Iran not to go after nuclear weapons, we are ready to negotiate and reach an agreement," Hossein Mousavian, another of Iran's nuclear negotiators, told IRNA.

"However, if they want to prevent Iran producing the fuel it needs for its nuclear power plants, Iran will not welcome negotiations or these incentives."