Compromise possible?

Iran, one of the world's largest oil producers, says its nuclear programme is a peaceful attempt to generate electricity and medical isotopes for cancer patients.

But its refusal to halt sensitive nuclear work which can have both civilian and military purposes has been punished with intensifying U.S. and European steps targeting its lifeblood oil exports.

"Given that oil revenue accounts for over half of government income, the budget will be under significant strain this year as oil exports fall as a result of sanctions and oil production is cut back by Iran as its pool of buyers begins to shrink," said Dubai-based independent analyst Mohammed Shakeel.

In a sign of what is at stake in the attempt to restart diplomacy, the fate of a new package of sanctions on Iran proposed by U.S. lawmakers may hinge on whether progress is made at the Istanbul talks.  

Western officials have made clear their immediate priority is to convince Tehran to cease the higher-grade uranium enrichment it began in 2010. It has since expanded that work, shortening the time it would need for any weapons "break-out".

Iran has signalled some flexibility over halting its enrichment to a fissile purity of 20 percent - compared with the 5 percent level required for nuclear power plants - but also suggests it is not ready to do so yet.

Iranian leaders would probably expect to be rewarded with an easing of sanctions if they agree to scale back their sensitive nuclear work, but Western officials say this is not an issue up for negotiation in Istanbul.

"Stopping 20 percent enrichment would be seen as a gesture to start negotiations, not to lift sanctions," one diplomat at the talks said.    

In the end, experts and some diplomats say, both sides must compromise for any long-term deal to resolve the dispute: Iran could keep enriching uranium to low levels in return for accepting much more intrusive U.N. nuclear inspections.

"From a non-proliferation point of view, zero enrichment is beneficial, but not necessary to prevent a nuclear-armed Iran," Ali Vaez of the International Crisis Group thinktank said.