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* New centrifuges could enable faster uranium enrichment
* Iran presses ahead with nuclear work despite sanctions
By Fredrik Dahl
VIENNA, July 15 (Reuters) - Iran is stepping up centrifuge development work aimed at making its nuclear enrichment more efficient, diplomats say, signalling a possible advance in the Islamic Republic's disputed atomic programme.
Two newer and more advanced models of the breakdown-prone machine that Iran now operates to refine uranium are being installed for large-scale testing at a research site near the central town of Natanz, the diplomats told Reuters this week.
If Iran eventually succeeds in introducing the more modern centrifuges for production, it could significantly shorten the time needed to stockpile material that can have civilian as well as military purposes, if processed much further.
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 denies Western accusations it is seeking to develop nuclear weapons and says it is refining uranium for electricity generation and medical applications.
Tehran's refusal to halt enrichment has drawn four rounds of U.N. sanctions rounds, as well as increasingly tough U.S. and European punitive measures on the major oil producer.
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 for those plans, diplomats said work was under way to set up two units of 164 new machines each. Until now, only smaller chains or individual centrifuges of the IR-4 and IR-2m models have been tested at the R&D site.
"They are moving forward here," said one senior diplomat, from a member state of the International Atomic Energy Agency. "This is slow and steady but notable progress they are making."
Other diplomats confirmed that installment was taking place, but was not yet finished. There was no comment from Iran's mission to the IAEA, the Vienna-based U.N. atomic watchdog.
Testing of a complete 164-centrifuge cascade has been due for a long time and it would be an "important step," said Olli Heinonen, a former head of IAEA inspections worldwide.
Robert Einhorn, the U.S. State Department's senior adviser for non-proliferation and arms control, said in March he did not believe the newer centrifuges were ready to be mass produced, according to a transcript of a think tank debate.
"It's taken them quite a long time to graduate ... to more advanced centrifuges. And that's fortunate," Einhorn said.
Iran's main enrichment production facility is also located at the Natanz complex, which is ringed by anti-aircraft guns to protect against any threatened Israeli or U.S. air strikes.
Thousands of old model centrifuges spin at supersonic speeds in an underground hall to increase the fissile isotope ratio.
Western experts say tightening sanctions, technical woes and possible cyber sabotage have slowed Iran's atomic advances. But it is still steadily amassing low-enriched uranium.
"They continue to pour fairly vast resources into this effort and they are making progress," the senior diplomat said.
Iran's decision in early 2010 to raise the level of some enrichment from the 3.5 percent purity needed for normal power plant fuel to 20 percent worried Western states that saw it as a significant step towards the 90 percent needed for bombs.
Iran says it needs 20 percent uranium to produce fuel for a research reactor making isotopes to treat cancer patients.
But Western experts say it could enable Iran to more rapidly break out and produce weapons-grade material, if it so decided.
"The production rate of 20 percent enriched uranium far exceeds the current needs of Iran," Heinonen said.
Tehran said in June it would shift this higher-grade activity from the Natanz plant to an underground bunker near the clerical city of Qom, and also to triple output capacity.
Diplomatic sources say Iran is now preparing to install centrifuges soon at the site known as Fordow, tucked away deep inside a mountain. (Editing by Peter Cooney)