* U.S. wants first step from Iran to curb nuclear activity
* Iran says breakthrough deal possible but talks difficult
* Israel warns of "mistake of historic proportions"
* U.S. Senate panel to move forward on new sanctions
* Iran has warned more sanctions would torpedo deal
GENEVA, Nov 7 (Reuters) - Iran and six world powers appeared to be edging towards a deal on its disputed nuclear activity on Thursday, citing progress in negotiations building on a diplomatic opening from Tehran, although it cautioned that the discussions were "tough".
The United States said the powers would consider relaxing some sanctions against Iran if it takes verifiable steps to limit a nuclear programme, a long elusive compromise that could reduce the risk of another Middle East war.
Lending urgency to the need for a breakthrough soon, a U.S. Senate committee said it would pursue a package of tough new sanctions on Iran after the current Geneva talks end on Friday.
President Barack Obama has been pushing Congress to hold off on more sanctions against Iran, demanded by its arch-enemy Israel, to avoid undermining the diplomacy aimed at defusing fears of an Iranian advance towards nuclear arms capability.
A spokesman for the European Union foreign policy chief - who is presiding over the talks - said on Thursday evening that the powers and Iran were "making progress" towards easing a decade-long standoff over Iran's nuclear intentions.
Michael Mann said EU foreign policy chief Catherine Ashton would meet Iran's foreign minister and chief negotiator, (Mohammad Javad Zarif, on Friday morning "to allow more time to work through some issues". Diplomats from the six nations would also meet early on Friday to prepare Ashton's talks with Zarif.
Zarif himself reported progress earlier in the day, telling Reuters: "The talks went well ... I'm hopeful that we can move forward. We are making progress, but it's tough."
In an interview with CNN later, Zarif suggested that a partial suspension of Iran's disputed uranium enrichment programme might be possible - a concession it ruled out before moderate President Hassan Rouhani's election inn June.
"There won't be a suspension of our enrichment programme in its entirety," Zarif said. (But) we are prepared to address immediate concerns ...
"I hope by tomorrow morning we can start serious work in order to prepare some sort of a joint statement that would address these three important elements, that is a common objective for all seven of us..., an end game that we all try to reach within a limited period of time, hopefully in less than a year, and a series of actions that the two sides will take reciprocally in order to build to confidence and address their most immediate concerns," Zarif said.
"I believe it is possible to reach an understanding or an agreement before we close these negotiations tomorrow evening."
BREAKTHROUGH FAR FROM CERTAIN
The powers hope to reach a "first step" deal to allay concerns about Tehran's nuclear programme - which the West fears may be aimed at developing a nuclear weapons capability - though both sides say a breakthrough is far from certain.
The White House said U.S. diplomats also held "substantive and serious" bilateral talks with Iran in Geneva - all but inconceivable before Rouhani took office, replacing bellicose conservative hardliner Mahmoud Ahmadinejad.
Iran and the United States have had no diplomatic ties since soon after the 1979 Islamic Revolution that overthrew the U.S.-backed monarchy, and their mutual enmity and mistrust has posed the biggest obstacle to any breakthrough nuclear deal.
White House spokesman Jay Carney said that in exchange for "concrete, verifiable measures" by Iran to address long-standing international concerns, the six powers "would consider limited, targeted, and reversible relief that does not affect our core sanctions architecture".
The broader sanctions regime would be maintained until there is a "final, comprehensive, verifiable" accord, Carney told reporters. If Iran did not follow through towards the goal, modest sanctions relief could be reversed and stiffer penalties imposed, he said.
The U.S. Senate Banking Committee chairman declared the panel was moving forward on a proposal for new sanctions, a step likely to please Israel which has railed against compromise proposals under discussion in Geneva, describing them as potentially "a mistake of historic proportions".
Senator Tim Johnson, a Democrat, said Senate Majority Leader Harry Reid told him to go ahead with a step bring the bill closer to a vote by the full Senate.
"We'll wait until the Geneva meeting is over with, but I talked to Harry Reid about it yesterday and he wants to mark (it) up," Johnson told Reuters outside the Senate chamber.
MORE SANCTIONS COUNTER-PRODUCTIVE, IRAN WARNS
Iran has warned that any further intensification of sanctions that have badly damaged its oil-based economy would torpedo any prospects for an agreement with the powers.
Iran says it is enriching uranium solely for peaceful nuclear energy and wants the powers to start lifting harsh sanctions severely damaging the OPEC producer's economy.
Both sides have limited leeway for compromise, with hardliners in Iran and in Washington likely to denounce any concession they regard as going too far.
Iranian Deputy Foreign Minister Abbas Araqchi said after the morning meetings that he hoped a deal could be struck but "the differences are widespread and deep. This is undeniable".
The Iranian delegation held a series of meetings - one with all three European delegations, then, separately, with the Russians, the Chinese and the Americans.
Araqchi met for an hour with U.S. delegation chief Wendy Sherman, Under Secretary of State for Political Affairs, in a meeting that a senior State Department official described as a "substantive and serious conversation".
ROLLING BACK NUCLEAR PROGRAMME?
The United States and its allies say they are encouraged by Tehran's shift to conciliatory rhetoric since the election of Rouhani. After years of deepening hostility that raised the spectre of another Middle East war, Rouhani has pledged to try to repair ties with the West and secure relief from sanctions.
But the Western allies say Iran must back its words with action and take concrete steps to scale back its atomic work.
"What we're looking for is a first phase, a first step, an initial understanding that stops Iran's nuclear programme from moving forward and rolls it back for the first time in decades," a senior U.S. official said on the eve of the talks.
That would help buy time needed for the Islamic Republic and the powers to reach a broader diplomatic settlement and avert conflict that would destabilise the global economy.
The six nations want Iran to suspend its most sensitive uranium enrichment efforts, reduce its stockpile of such material and diminish its capacity to produce it in the future.
In return for any concessions, Iran wants the powers to lift the sanctions that have slashed its oil revenues by 60 percent since 2011 and cut the value of its currency in half.
The exact nature of a possible first step remain unclear. But the six global powers are unlikely to agree on anything less than a suspension of enrichment of uranium to 20 percent fissile purity, a level that constitutes a major milepost on the way to producing fuel for a nuclear warhead.
The U.S. official said Iran at this stage must address important aspects of its nuclear activity, including more rigorous U.N. inspections. Iran's construction of a research reactor near the town of Arak is also a growing concern for the West because of its potential to yield plutonium for bombs.
A senior aide to a U.S. senator briefed by the White House and State Department said Washington would offer to work with Iran in a six-month confidence-building period. During that time Washington would offer Tehran, among other things, relaxed restrictions on Iranian funds held in overseas accounts.
In exchange, Iran would stop enriching uranium to 20 percent and convert its existing stockpile of 20 percent uranium to an oxide form suitable for processing into reactor fuel, and take other measures to slow the programme.
Western diplomats involved in the talks are hesitant to divulge specifics about the discussions due to sensitivities involved. But Israeli Prime Minister Benjamin Netanyahu said he disliked the outlines of a preliminary deal emerging in Geneva because it would allow Iran to keep a nuclear capability.
"Israel totally opposes these proposals," he said in a speech. "I believe that adopting them would be a mistake of historic proportions. They must be rejected outright."
Widely assumed to be the Middle East's only nuclear power, Israel views Iran as a threat to its existence and has warned it could launch pre-emptive strikes against Iranian nuclear sites if diplomacy fails to stop the programme.
(Additional reporting by Justyna Pawlak and Fredrik Dahl in Geneva, Timothy Gardner in Washington,; Marcus George in Dubai; Editing by Mark Heinrich)