Western and non-aligned states have been unable to reach a compromise on the matter at a session on technical co-operation running from Monday to Wednesday of the International Atomic Energy Agency's 35-nation board of governors, diplomats said on Tuesday.
Diplomats said the plan now was for the technical session to make no recommendation, as it usually does, on a package of aid projects and for the matter to be taken up fresh when the IAEA's 35-nation board of governors meets in a regular political session Thursday and Friday.
"G-77 nations (developing states) are saying that approving aid is a technical decision but that removing a project is a political decision," a Western diplomat told AFP.
IAEA deputy director for technical co-operation Ana Maria Cetto had Monday told the board that technical aid for Iran's Arak reactor, which Tehran is going ahead with in any case, did not pose a proliferation threat and so could not be denied by the agency.
The European Union, however, argued that while the aid might be benign, the reactor itself would produce significant quantities of plutonium and would involve "a significant proliferation risk."
"We cannot support providing technical assistance to a heavy water research reactor project that the board has several times asked Iran to reconsider," Finnish ambassador Kirsti Helena Kauppi said on behalf of the EU.
Kauppi said Iran's request for IAEA funding was "not consistent" with the resolutions of the board of governors and the UN Security Council, which has threatened sanctions to get Tehran to rein in its nuclear program.
US ambassador Gregory Schulte said "the reactor, once completed, will be capable of producing plutonium for one or more nuclear weapons each year."
Iran is requesting technical help in guaranteeing safety at the heavy-water reactor under construction at Arak, 200 kilometres (120 miles) south of Tehran.
Schulte said the United States would however not oppose seven other projects for Iran which are in the package of 832 projects being considered.
Other Iranian projects include aid for "human resource development and nuclear technology support" and helping start up the Bushehr nuclear power reactor, according to IAEA data.
The United States, the EU, Canada and Israel were among those calling on the IAEA to block the Arak aid, while Russia, China and non-aligned states argued that it should be granted in speeches on Monday.
The non-aligned states were particularly anxious to protect the principle of the transfer of peaceful nuclear technology to developing countries.
The West has a majority on the board but is working for a consensus decision.
Diplomats said a compromise being hammered out was to defer a decision on Arak, rather than reject the idea of technical co-operation outright.
"The Arak project will be removed from the (technical co-operation) list so that the list can be adopted," one diplomat said.
"The Arak project will be deferred without a deadline," the diplomat said, adding that Iran was pushing however for a deadline for aid to be forthcoming.
The IAEA had in February asked Iran to "reconsider" building the Arak reactor.
This was re-stated in a UN Security Council resolution in July, which also called on Iran to suspend making enriched uranium, which like plutonium can fuel civilian reactors but used in highly enriched form to make atom bombs.
The Security Council is now working on a resolution to impose sanctions on Iran, as Tehran has refused to suspend uranium enrichment.
Iran says it is building the Arak reactor to produce medical isotopes and to replace a smaller, ageing, light-water reactor in Tehran.

Copyright AFP (Agence France-Presse), 2006