Iran has ignored a deadline to respond to a proposed deal from the UN nuclear watchdog, saying it would give its verdict next week. Tehran's playing for time, coupled with reports of a counter-proposal that would keep its enriched uranium in-country, cast fresh doubts on the success of the diplomatic channel and raised the prospect of further sanctions against the Islamic republic.

The International Atomic Energy Authority (IAEA) had given Tehran until Friday to sign up to an agreement under which it would send its uranium to Russia and France for enrichment. As the deadline loomed, state television quoted a member of Iran's negotiating team who attended last week's talks in Vienna as saying that Tehran preferred to buy in nuclear fuel from abroad. This would fail to reduce Iran's domestic stockpile from worrying the international community, which fears it could be used for weapons.

As fears grew that the negotiations might be on the brink of collapse, the IAEA issued a statement saying that Iran had asked for more time to respond to the proposal, which had already been accepted by Washington, Paris and Moscow.

"Iran informed [us] today that it is considering the proposal in depth and in a favourable light, but needs until the middle of next week to provide a response," it said.

US president Barack Obama has stepped up diplomatic engagement with the Iranian regime since coming to power, and Tehran's signature on the deal would have been seen as a major triumph for this new approach. Last night, a US state department spokesman said: "Obviously we would have preferred to have a response today. We approach this with a sense of urgency... We hope that they will next week provide a positive response".

Talks were continuing last night, but Bernard Kouchner, the French foreign minister, said: "I cannot say the situation regarding Iran is very positive."

Earlier in the day, Iranian television quoted a senior Iranian negotiator as saying: "Iran is interested in buying fuel for the Tehran research reactor. We are waiting for the other party's constructive and trust-building response."

David Albright of the Washington-based Institute for Science and International Security, which monitors nuclear proliferation, said: "This is a bad sign – buying nuclear fuel abroad is a complete non-starter. They seem to be looking for modifications that would fundamentally weaken the deal."

Although the IAEA's plan has not been made public, it is understood that it entails Iran shipping out 1.2 tonnes of its stockpile of 1.5 tonnes of low-enriched uranium to the IAEA. It would then be passed to Russia for refinement to 19.7% purity, and then moved on to France to be turned into fuel rods.

If Tehran signs up to the deal, it would seriously handicap the country's options for manufacturing nuclear weapons, as 0.98 tonnes is the generally accepted amount of low-enriched uranium needed for a single nuclear bomb.

Circulating the proposals to the representatives of the Western powers and Iran in Vienna midweek, Mohamed ElBaradei, head of the IAEA said: "I very much hope that people see the big picture: see that this agreement could open the way for a complete normalisation of relations between Iran and the international community."

However, according to diplomatic sources, even if Iran finally agrees to the deal, it would demand that the uranium is sent out in separate batches over a prolonged period. The IAEA plan is for the entire amount to be transferred in one single shipment.

Most analysts agree that a failure to secure a deal would not mean that there would be military strikes on Iranian nuclear facilities in the near future.

However, yesterday America and Israel launched a major joint military exercise with more than a thousand US troops and 17 US Navy ships joining Israeli forces for a week-long exercise. Israeli officials have kept up warnings that they reserve the right to carry out a pre-emptive attack on the facilities if the diplomatic dialogue fails.

Tough sanctions likely by Anne Penketh

By ignoring the deadline for the Western offer, Iran is playinginto the hands of US lawmakers and those within the Obama administration pushing for increased sanctions against Tehran.

Democratic representative Ron Klein of Florida unveiled legislation last week that could bar telecommunications giants such as Nokia and Siemens from trading with Tehran, saying: "It is time for companies to make a choice: either do business with the US government or do business with Iran."

Sanctions that would target refined petroleum reaching Iran – which has a shortage of domestic refining capacity and is dependent on petrol imports to meet 40% of its needs – are being readied by Howard Berman, chairman of the House Foreign Affairs Committee. The legislation would in effect bar any foreign entity that sells refined petroleum to Iran from doing business in the US.

Iran again seems to be playing for time with yesterday's mooted counter-response to the Vienna proposal, seeking to keep control over its nuclear fuel cycle rather than outsource it to foreign powers. Iran has remained steadfast on this key point: that it has a treaty right to enrich uranium on its soil for peaceful purposes.

But Tehran's reported plan – which would necessitate the waiving of sanctions already in force – is certain to be rejected by the US, France and Russia which backed the International Atomic Energy Agency proposal. Meanwhile, the Iranian uranium enrichment programme continues unabated in defiance of UN calls for Iran to desist, amid fears among Western governments that the Iranians are bent on building a nuclear weapon.

Timeline: Nuclear negotiations

25 September: In a dramatic press conference at the G20 summit in Pittsburgh, Barack Obama – flanked by Nicolas Sarkozy and Gordon Brown – reveals the existence of a secret underground nuclear reactor at Qom, and calls for fresh sanctions against Tehran.

1 October: Iranian diplomats meet representatives of international powers in Geneva and agree to inspections at Qom. It also said it would send uranium to be processed overseas.

21 October: Despite tensions over Iran's refusal to negotiate with France, three days of talks in Vienna conclude with a draft IAEA deal.

Friday: Iran ignores the deadline to respond to the IAEA proposal, instead offering its own plan.