The United States has dropped its demand the U.N. atomic watchdog declare Iran in violation of the nuclear Non-Proliferation Treaty, despite its belief Tehran wants to build an atom bomb, Western diplomats said on Saturday.

After two days of talks, the U.N. International Atomic Energy Agency's (IAEA) 35-member Board of Governors on Friday adjourned until Wednesday to give diplomats a chance to revise a French, German and British draft resolution condemning Iran's 18-year concealment of sensitive nuclear research.

However, Western diplomats said informal talks continued on Saturday between Washington and the capitals of the European Union's "big three" to toughen up the trio's proposal, two drafts of which the Americans rejected as too weak.

"Talks are definitely ongoing, though much of the discussion is taking place in the capitals," a Western diplomat said.

Diplomats close to the talks said U.S. officials had foregone their demand for the resolution to contain an explicit reference to Iran's past "non-compliance" with its NPT obligations and that Tehran be reported to the U.N. Security Council, which could choose to impose economic sanctions.

"I think the U.S. will accept a resolution without an explicit reference to non-compliance," another diplomat said.

Diplomats told Reuters U.S. negotiators had abandoned early last week their demand that Iran be reported to the Council when it became apparent only four other board members -- Japan, Canada, Australia and New Zealand -- would support this.

In exchange, diplomats close to the talks said the United States, which is convinced Iran wants nuclear weapons, were now helping Britain, France and Germany revise the resolution to include a timetable to keep pressure on Iran to cooperate.

The French, British and Germans want to encourage Iran to continue with its stated policy of fully cooperating with the IAEA rather than punish it for past failures. Diplomats said Germany especially feared too harsh a resolution would backfire and cause Iran to stop cooperating with the United Nations.

BOMB PLANS HATCHED DURING IRAN-IRAQ WAR

In October, Iran gave the IAEA what is said was a full and accurate declaration of its nuclear program and said it had no more nuclear secrets to disclose. Tehran admits covering up the full extent of its atomic program but denies wanting bombs.

But a senior Western diplomat said there was no question Iran had an atomic weapons program that most likely began during the fierce Iran-Iraq war that lasted from 1980 to 1988. He added that there were suspicions the program still exists.

The United States harshly criticized the IAEA for saying in a recent report on Iran that it had "no evidence" suggesting Tehran had a secret weapons program.

U.S. Ambassador to the IAEA, Kenneth Brill, told the board on Friday the phrase "no evidence" was "highly unfortunate" in the light of revelations about Iran's cover-up and secret experiments with plutonium reprocessing and uranium enrichment. He said the IAEA should have used the words "no proof" instead.

Brill said the IAEA's wording had provoked "expressions of disbelief that the institution charged with... scrutinising nuclear proliferation risks was dismissing important facts."

IAEA chief Mohamed ElBaradei reacted strongly, calling the U.S. statement "disingenuous."

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