Iran has begun to process a new batch of uranium to convert it to a gas that can be enriched into the material for nuclear bombs, diplomats say.
Diplomats said the move would hamper efforts to restart talks
"Conversion has resumed," a diplomat close to the International Atomic Energy Agency in Vienna said.
The move comes despite heavy pressure from the US and Europe for Iran to cease all nuclear activity.
Iran denies Western claims that it has a secret nuclear weapons programme, saying it just wants nuclear power.
IRAN'S NUCLEAR STANDOFF
September 2002: Work begins on Iran's first nuclear reactor at Bushehr
December 2002: Satellite photographs broadcast on US television reveal the existence of nuclear sites at Arak and Natanz. Iran agrees to an IAEA inspection
September 2003: IAEA gives Iran weeks to prove it is not pursuing atomic weapons
November 2003: Iran suspends uranium enrichment and allows tougher inspections; IAEA says no proof of any weapons programme
June 2004: Iran rebuked by IAEA for not fully co-operating with inquiry into nuclear activities
November 2004: Iran suspends uranium enrichment as part of deal for negotiations with EU
August 2005: Iran rejects EU proposals and resumes work at Isfahan nuclear plant
Uranium enriched to a low level is used to produce nuclear fuel, while further enrichment makes it suitable for use in atomic weapons.
Diplomats told the BBC that IAEA inspectors had witnessed the new round of uranium conversion at Iran's facility in Isfahan.
Another said the move would hamper efforts to restart negotiations between Europe and Iran over its nuclear programme.
"It's not good news, no, not at all. Because people were trying to arrange for new talks and now it's more difficult," said a senior European diplomat quoted by the AFP news agency.
Earlier this month Iran called on Britain, France and Germany to resume negotiations, following the breakdown of talks in August, when Iran resumed nuclear conversion for the first time after a nine-month hiatus.
In September, the IAEA's board called on Iran to cease all nuclear fuel work.
Since then, Russia has been lobbying with Iran for a compromise.
NUCLEAR FUEL CYCLE
Mined uranium ore is purified and reconstituted into solid form known as yellowcake
Yellowcake is converted into a gas by heating it to about 64C (147F)
Gas is fed through centrifuges, where its isotopes separate and process is repeated until uranium is enriched
Low-level enriched uranium is used for nuclear fuel
Highly enriched uranium can be used in nuclear weapons
The IAEA's board of governors is set to meet again next week, when Western members could press for Iran to be referred to the UN Security Council for possible sanctions.
The US and Europe want Iran to give up all activities that could be used to make nuclear weapons. They say Iran can keep nuclear power plants, but that uranium should be enriched elsewhere, perhaps in Russia.
The Isfahan plant is Iran's main uranium conversion facility. Conversion is an early stage in the nuclear fuel cycle, turning raw uranium - known as yellowcake - into the "feedstock" gas uranium hexafluoride (UF6).
This gas can then be fed through centrifuges several times to enrich it to low-level nuclear fuel, or high-level material for atom bombs.
Diplomats told AFP that after this round of conversion Iran might have enough UF6 to make 10 bombs.