A UN watchdog report is expected to show that Iran has installed more uranium enrichment centrifuges at an underground site, potentially boosting the output capacity of nuclear work major powers want it to stop, Western diplomatic sources say.

According to Reuters, two sources said Iran may have placed in position nearly 350 machines since February - in addition to the almost 700 already operating at the Fordow facility for higher-grade enrichment - but that they were not yet being used to refine uranium.

If confirmed in the next quarterly report on Iran's nuclear program by the UN International Atomic Energy Agency (IAEA), expected on Friday, this is likely to be seen as a sign of continued defiance by the Islamic state of international demands that it suspend such activity.

Getting Tehran to halt its enrichment of uranium to a fissile concentration of 20 percent - which it started two years ago and has since sharply expanded - was a key priority for world powers in their talks with Iran in Baghdad which continued for a second day on Thursday.

Progress in Iran's nuclear program is closely watched by the West and Israel as it could determine how much time Iran would need to build nuclear bombs, should it decide to do so. Iran says its program is entirely peaceful.