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By Fredrik Dahl

VIENNA Fri May 23, 2014 8:40pm BST

The flag of the International Atomic Energy Agency (IAEA) flies in front of its headquarters during a board of governors meeting in Vienna November 28, 2013. .

Credit: Reuters/Heinz-Peter Bader

VIENNA (Reuters) - Iran has cut its most sensitive nuclear stockpile by around 80 percent under an interim pact with world powers and has begun engaging with a long-stalled IAEA investigation into suspected weapons research, the U.N. atomic watchdog said on Friday.

The findings, in a quarterly report by the International Atomic Energy Agency, are likely to be welcomed by the six powers trying to negotiate a long-term deal with Iran on ending a decade-old dispute over its nuclear programme and dispelling fears of a new war in the Middle East.

Diplomats and analysts caution, however, that the positions of Iran and the United States, France, Britain, Germany, Russia and China remain far apart and that a successful outcome of their diplomatic efforts is far from certain.

Iran rejects Western allegations that it has been trying to develop the capability to build nuclear weapons. But it has offered to work with the IAEA to resolve its concerns after pragmatist President Hassan Rouhani won office last year on a platform to end the Islamic Republic's isolation.

The IAEA, which has a pivotal role in verifying that Iran is living up to its part of the six-month accord reached in November, made clear that Iran so far is undertaking the agreed steps to curb its nuclear programme.

Under the breakthrough agreement that took effect on Jan. 20, Iran halted some aspects of its nuclear programme in exchange for a limited easing of international sanctions that have laid low the major oil producer's economy. It was designed to buy time for talks on a final deal that began in February.

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Iran cuts nuclear stockpile, engages with bomb probe - IAEA