World powers must not yield in their demand Iran abandon sensitive nuclear projects, Deputy Foreign Minister Danny Ayalon said on Wednesday, arguing Tehran had been allowed to "dictate" terms despite being vulnerable to sanctions.

Speaking a day after the formation of a unity government that is fueling speculation a preemptive war on Iran could be in the works, Ayalon voiced cautious hope for a peaceful resolution from international talks with Tehran due to resume on May 23.

"We would very much like the negotiations to succeed, because a political solution is better than any other option," he said. "At the same time, a bad deal would be worse than no deal."

Talks between Iran and the five UN Security Council permanent members plus Germany resumed last month, more than a year after they collapsed with powers failing to persuade Tehran to abandon uranium enrichment. The next round of talks is expected to take place later this month in Baghdad.

The United States and European Union have imposed tough new sanctions on Iran's oil exports this year, and say they hope this can force Tehran to make a deal to curb a nuclear program they believe aims to make an atomic bomb.

Israel says it could attack Iran if it thinks that is the only way to stop it from getting nuclear arms. Washington and Brussels have been urging Israel not to launch any strikes until diplomacy has a chance, but Israeli officials say time is short.

Like Israel, the powers have insisted that an eventual accord require Iran to suspend uranium enrichment. But the Los Angeles Times reported last month that Washington might agree to allow Iran to continue processing uranium to 5 percent fissile purity.

If enriched further, uranium can be used to fuel warheads. Iran says it has no military designs and seeks only nuclear energy and medical isotopes. It says it will never agree to curbs on its uranium enrichment.

"The fact we hear some rumors about compromise, about meeting them halfway here and there, I think is very, very dangerous," Ayalon told Reuters in a small conference room in Israel's parliament that, to double as a wartime shelter, had been fitted with an industrial air filter and blast-proof walls.

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Iranian threat

Allowing Iran to keep enriching and stockpiling uranium could enable Tehran to opt for a bomb "in very short order", he said, adding that those projects were already "accelerating".

Israel's Iran timelines have often been more urgent than those of its Western allies. But with Prime Minister Binyamin Netanyahu now saying the Iranians are just months away from fortifying their nuclear sites against air strikes, fears of an imminent new Middle East conflict have surged abroad.

Netanyahu's alliance with centrist opposition leader Shaul Mofaz on Tuesday appeared to buttress Israel further for war. Yet Iran strategy did not feature in the two leaders' coalition negotiations, a senior official told Reuters, adding that Israel potentially had until 2013 to decide how to tackle its arch-foe.

In Israel a day after Netanyahu dropped his political bombshell, Catherine Ashton, the EU foreign affairs chief and senior liaison for the six world powers in talks with Tehran, briefed the prime minister about the nuclear negotiations.

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