Iran should be allowed to enrich uranium for power generation provided there is close monitoring by U.N. inspectors to ensure it is not trying to develop atomic weapons, Germany's defense minister said.

German Defence Minister Franz Josef Jung during an interview with Reuters at the defence ministry in Berlin, June 26, 2006. Iran should be allowed to enrich uranium for peaceful purposes with close monitoring by U.N. inspectors to ensure that it is not trying to develop atomic weapons, Germany's defence minister said. [Reuters]

The minister's comments may suggest that after years of failed negotiations with Iran, Germany and some other Western powers were willing to compromise with Iran over enrichment in order to resolve peacefully the nuclear stand-off with Tehran.

But it was clear that this view was unacceptable to Washington, which contacted the German government to clarify it and said Berlin had dismissed the Reuters story as "erroneous."

But the German government did not challenge the story.

In an interview with Reuters this week, Defense Minister Franz Josef Jung was asked if Iran should be allowed to enrich uranium under the scrutiny of the Vienna-based International Atomic Energy Agency (IAEA).

He said: "Yes, I think so. The offer includes everything. That means the civilian use of nuclear energy is possible but not atomic weapons. And monitoring mechanisms must be applied. I think it would be wise for Iran to accept this offer," he said.

Jung was referring to a June 6 offer of incentives made to Iran by Germany and the five permanent U.N. Security Council members -- the United States, Britain, France, China and Russia.

State Department spokesman deputy spokesman Adam Ereli denied there were any divisions among the major powers. He said that the German government had been contacted about the interview and told Washington "this is an erroneous story."

But Berlin did not deny it or say that it was "erroneous."

German government spokesman Ulrich Wilhelm said in a statement to Reuters that it stood firm with the five council members on the issue of Iran in backing the June 6 offer and reiterated that Berlin wanted Iran to suspend enrichment in order to enable negotiations on the offer to take place.

"It's up to Iran, through a suspension of enrichment, to create the conditions for negotiations and win back international trust," Wilhelm said.

"Nothing has changed regarding the position of the six countries and the German government," he said.

Western countries worry that Iran is trying to develop nuclear weapons under cover of an atomic power program. Iran says it only wants peaceful nuclear energy.

Diplomats familiar with the offer say it does allow for Iran to enrich, though the timeframe would have to be negotiated.

Jung did not mention any timeframe when Iran - which has been enriching uranium for months on a small scale - could be permitted to make nuclear fuel with the West's blessing. But he said close IAEA oversight would be sufficient to show the world whether Tehran's nuclear program was as peaceful as it says.

"IAEA inspections can provide those assurances through monitoring. That is not a problem," he said.

It may be that the implication that Iran could, at least in theory, safely enrich uranium under IAEA supervion is what prompted the U.S. reaction to Jung's comments. Many in Washington would prefer that Iran not enrich at all for many years to come - if ever.

But according to one IAEA diplomat, who requested anonymity due to the sensitivity of the issue, there are officials in all six of the countries that made the offer who agree with Jung.

Jung, a member of Chancellor Angela Merkel's conservative Christian Democrats, said he understood U.S. reservations but added that a ban on Iranian enrichment work was unrealistic.

"One cannot forbid Iran from doing what other countries in the world are doing in accordance with international law. The key point is whether a step toward nuclear weapons is taken. This cannot happen," he said.

Although all six countries that back the incentives offer would prefer that Iran suspend its enrichment program, there is growing concern that the deadlock over whether Iran should be allowed keep its enrichment program could prevent negotiations with Iran from ever taking place, diplomats in Vienna have said.

The IAEA diplomat said Jung's comments were a nice surprise.

"If this position is not retracted or undermined by accusations of going-it-alone, then it's real news," the diplomat said. "If we all want a negotiated solution, this is the only realistic, sensible and reasonable way forward."

Tehran has yet to respond to the offer and the United States and Germany have called for an answer by the G8 summit in July.