The South Korean Government has admitted its scientists experimented secretly with nuclear fuel enrichment.
By Charles Scanlon
BBC correspondent in Seoul
Experts say the technique used could have military implications, but a government official denied any intention to build a weapons programme.
A European based diplomat said the work was a violation of South Korea's international nuclear commitments.
The discovery could lead to calls for South Korea to be referred to the UN Security Council, like North Korea.
It is also likely to cause severe embarrassment to Seoul, and its key ally the US.
A team of inspectors from the IAEA secretly rushed to South Korea last week, after the government revealed that the country had broken its commitments on nuclear proliferation.
Seoul made the admission under the terms of a tougher inspection regime that is just coming into effect.
A South Korean government official told the BBC that the research, which involved the use of lasers to enrich nuclear fuel, was not authorised by the government.
The official said it was a "rogue" operation which ended four years ago, and concerned the production of a tiny amount of highly enriched uranium, which could be used for an atomic bomb.
The official said the research was for the domestic production of nuclear fuel for the country's civil programme.
However, according to analysts, there is no credible civilian use for the technique, which uses lasers to create weapons-grade uranium.
'Same as Iran'
South Korean officials said the government only found out about the experiments in the last few months, and were now investigating the scientists responsible.
A European-based diplomat said their actions were a clear violation of the nuclear non-proliferation treaty, and could put South Korea into the same category as Iran.
South Korea abandoned a nuclear weapons programme in the 1970s, under intense pressure from the United States.
It has since committed itself to a nuclear-free Korean peninsula, and has been at the forefront of efforts to persuade North Korea to give up its development of atomic bombs.
The finding is likely to cause deep embarrassment to the US, which regards Seoul as a close ally in its attempts to persuade the North to abandon its nuclear ambitions.
According to IAEA spokesman Mark Gwozdecky, the inspectors will leave South Korea early next week, and their findings will be presented to the agency's Board of Governors on 13 September.