Iran has agreed in principle to a Brazilian proposal on a nuclear fuel swap, amid stepped up efforts by the United States and its key allies to impose fresh sanctions against Tehran.

Iranian President Mahmoud Ahmadinejad in a telephone conversation with his Venezuelan counterpart Hugo Chavez said Tehran agreed with Brazil's proposal on the swap for its research reactor in Tehran, Iran's semi official Fars News Agency (FNA) reported.

However, Mr. Ahmadinejad's conciliatory move coincided with an announcement by senior Iranian commander that Tehran would begin an over week-long naval exercise that will cover a vast area, starting from the Strait of Hormuz to large parts of the Indian Ocean.

The Strait of Hormuz, which links the Persian Gulf with the Sea of Oman, is vital for international oil transit.

Last week, visiting Brazilian Foreign Minister Celso Amorim said in Tehran he hoped for the revival of the swap deal, which would serve as a major step to defuse tensions.

Analysts say the Brazilian offer is likely to be substantiated during the visit of President Luiz Inacio Lula da Silva to Tehran later this month.

Brazil is currently a non-permanent member of the U.N. Security Council — the forum where sanctions on Iran are being discussed.

The nuclear swap was first proposed by the International Atomic Energy Agency (IAEA) following talks last year in Vienna among Iran, the U.S., Russia and France. Under the proposal, Iran was to transfer abroad the bulk of its lightly enriched uranium in return for nuclear fuel rods from France.

The fuel was required for running the Tehran Research Reactor, engaged in producing medical isotopes needed for treating cancer patients.

Meanwhile, Iran's naval commander Rear Admiral Habibollah Sayyari has announced a six-stage integrated exercise, involving naval warships, planes and air defence units.

The eight-day exercise will be conducted in a 25,000 sq km area, stretching from the Strait of Hormuz to the Pakistani and Indian coasts.

The command centre for the exercise, code-named “Vellayat 89,” will be located at Iran's southern port city of Jask, FNA reported.

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