By Mark Heinrich

VIENNA (Reuters) - Iran's progress in enriching uranium has rendered unrealistic world powers' quest to prevent Tehran from gaining nuclear expertise, the director of the U.N. atomic watchdog agency said.

Mohamed ElBaradei said Iran was obliged to heed a U.N. Security Council demand that it suspend enrichment in exchange for a suspension of sanctions against it and talks on a solution that would allay suspicion Tehran is trying to build atom bombs.

"But from a proliferation perspective, the fact of the matter is that one of the purposes of suspension -- keeping them from getting the knowledge -- has been overtaken by events," the International Atomic Energy Agency chief said in remarks published by the New York Times and confirmed by an IAEA official.

Iran has ramped up its programme from the research level since the start of 2007, installing more than 1,600 enrichment centrifuges, divided into 10 fuel-cycle "cascades", or networks, in an underground complex by the start of May, diplomats said.

Tehran has been hooking up one cascade every week or so and intends to have 3,000 operational by next month to lay a foundation for "industrial-scale" enrichment, they said.

Speaking a week before an IAEA report on Iran to the Security Council, ElBaradei said it would be more sensible to cap Iranian enrichment short of industrial scale rather than try to freeze it altogether.

"Until all outstanding verification issues are clarified, and the agency is able to verify the peaceful nature of Iran's nuclear programme, the focus should be to stop them from going to industrial scale production, to allow us to do a full court press inspection and to be sure they remain inside the (nuclear Non-Proliferation) treaty."

Citing a sovereign right to nuclear energy for economic development, Iran has ruled out an atomic halt before, during or as an outcome of negotiations. It insists the enrichment programme is only to yield electricity.

"A FACT"

"We believe they pretty much have the knowledge about how to enrich. From now on, it is simply a question of perfecting that knowledge. People will not like to hear it, but that's a fact," ElBaradei said.

"The key message he is trying to get across ... is that as long as this standoff, this confrontation goes on, and Iran is not suspending, they will continue to develop their industrial capability," said one diplomat close to the IAEA.

"He's told the world that Iran has reached a point of no return and that the strategy of double suspension has failed," said a European diplomat accredited to the agency.

Asked about ElBaradei's remarks at a panel discussion, U.S. IAEA envoy Gregory Schulte said: "Some have argued Iran has acquired the knowledge. We think it has not fully mastered the technology.

"We don't think Iran is going to be able to acquire a nuclear weapon in the near term. So we still think (there is) time for diplomacy to succeed, (backed up by) targeted sanctions which seem to be having an effect, starting a debate among leadership about what is best for Iran," Schulte said.

If the IAEA report states, as widely anticipated, that Iran has ignored the May 23 deadline set by the Security Council to suspend enrichment, it will face a third, broader and harsher round of U.N. sanctions.

Three thousand centrifuges would be enough to refine uranium fuel for a bomb within a year.

The New York Times quoted IAEA officials on Monday as saying inspectors had concluded Iran was starting to enrich uranium in much larger quantities after solving technical glitches that dogged its research-scale programme.

But this did not mean Iran had attained industrial capacity, said Mark Fitzpatrick, non-proliferation analyst at the International Institute for Strategic Studies.

"(It is not clear yet) whether the centrifuges are operating at normal speed, whether the cascades are linked together and whether they are working continuously. Until then, they cannot be said to have mastered the technology... (though) at some point this year or next, Iran likely will reach that breakthrough," he told Reuters.