The International Atomic Energy Agency's executive told the nuclear watchdog's 35-nation board of governors, meeting in Vienna until on Friday, that technical aid for Iran's Arak reactor did not pose a proliferation threat.
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.
Iran is requesting technical help in guaranteeing safety at the heavy-water reactor under construction at Arak, 200 kilometres (120 miles) south of Tehran.
The United States, the EU, Canada and Israel were among those calling on the IAEA to block the aid, while Russia, China and non-aligned states argued that it should be granted.
The non-aligned states were particularly anxious to protect the principle of the transfer of peaceful nuclear technology to developing countries.
Diplomats said a compromise being hammered out was to defer a decision, rather than reject the idea of technical co-operation outright.
It was not clear if a consensus could be reached, as is traditional concerning technical co-operation at the IAEA, especially since Cuba was apparently insistent that the aid package should be approved intact.
In any case, Western nations and their allies have a majority if the matter comes to a vote, diplomats said.
A senior European diplomat told AFP that the co-operation would not be forthcoming.
"This is not a project we feel should be in any way helped or aided," the diplomat said.
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.
US ambassador Gregory Schulte has said the Arak reactor could produce enough plutonium for one or more nuclear weapons a year.
Iran says it is building the 40-megawatt, heavy-water reactor, which is expected to be ready by 2009, to produce medical isotopes and to replace a smaller, ageing, five-megawatt light-water reactor in Tehran which came online in 1967.
IAEA deputy director general for technical co-operation Ana Maria Cetto told the board that the aid projects Iran seeks, including Arak, waste disposal, cancer therapy and human resource development, conformed to the relevant Security Council resolution.
"Specifically, these projects do not contribute to enrichment-related or reprocessing activities in Iran," Cetto said.
The IAEA has not yet ruled on whether Iran is hiding work on developing nuclear weapons, as Washington claims, or carrying out what Tehran insists is a peaceful effort to generate electricity.
Iran's IAEA ambassador Ali Asghar Soltanieh told reporters the aid project would increase IAEA oversight at Arak and so "is in fact a big step for maximum transparency."
A rebuff on aid would leave Iran "very disappointed" but "this does not mean we will stop the project of Arak."

Copyright AFP (Agence France-Presse), 2006