By Fredrik Dahl

VIENNA (Reuters) - Iran and major nations have a "historic opportunity" to settle their decade-old nuclear dispute, but requiring the Islamic state to stop higher-grade uranium enrichment would be discriminatory, Tehran's former chief nuclear negotiator said.

Hossein Mousavian, now a visiting scholar at Princeton University in the United States, voiced optimism before next month's talks between Iran and the six major powers following a first meeting in Istanbul earlier this month.

They should set out their respective "red lines" regarding Iran's nuclear program and negotiate on the basis of those when they meet in the Iraqi capital on May 23, he told Reuters.

"The positive trend has started from Istanbul. It is important to keep up the positive trend in Baghdad and to go on," Mousavian, who was seen as a moderate when in the Iranian government, said by telephone on Tuesday.

He was Iran's chief nuclear negotiator from 2003 to 2005 before conservative President Mahmoud Ahmadinejad took over from his reformist predecessor Mohammad Khatami. According to Western envoys familiar with Mousavian, he appeared at the time to be genuinely interested in reaching a deal with the West.

The six powers - the United States, France, Germany, Britain, China and Russia - want to make sure Iran does not develop nuclear bombs. The Islamic Republic wants a lifting of sanctions and recognition of what it says are its rights to peaceful nuclear energy, including enriching uranium.

"The principles should be based on addressing the red lines of each party," Mousavian said, advocating a step-by-step approach with confidence-building actions by both sides.

If the red line for the powers is nuclear bombs, "then they should discuss the ways and means for Iran to cooperate with the IAEA (International Atomic Energy Agency) on transparency measures."

Both sides said they were content with progress made in the April 14 meeting in Istanbul which did not go into detail but, unlike earlier rounds of negotiations, stayed on the subject of Iran's nuclear program.

Analysts and some diplomats have said each side must compromise for any chance of a long-term settlement, suggesting Iran could be allowed to continue limited low-level enrichment of uranium if it accepts more intrusive nuclear inspections.

The West suspects Iran's enrichment program is part of a covert bid to develop the means and technology needed to build atomic weapons and has imposed harsh sanctions to make the Islamic Republic curb its activities.

This month's resumption of negotiations after a 15-month hiatus is widely seen as offering a chance to cool speculation the standoff could plunge the Middle East into war.

Israel's military chief said he did not believe Iran would decide to produce an atomic bomb, describing its leadership as "very rational" in an interview published on Wednesday.

Lieutenant-General Benny Gantz's characterization of Iran's rulers appeared to be at odds with Prime Minister Benjamin Netanyahu's oft-stated warnings that Tehran could opt to use nuclear weapons even at the risk of devastating retaliation.

WIN-WIN DEAL?

Iran, one of the world's largest oil producers, says it is refining uranium only to fuel a planned network of nuclear power plants and has repeatedly refused to halt enrichment. Continued...