TEHRAN (Reuters) - Iran said on Tuesday any exchange of nuclear fuel must take place on its territory, a condition rejected by Western powers seeking to prevent it stockpiling material which could be further enriched to make a bomb. The United States and its allies hope to get new United Nations sanctions imposed on Iran in the coming weeks over its continued uranium enrichment, after failing to reach agreement on the fuel exchange. But China expressed reservations on further sanctions, saying greater diplomatic efforts were needed. Western countries fear Iran wants to stockpile uranium to enrich it to levels that could be used for nuclear weapons. Iran says its sole aim is to run nuclear energy plants to generate electricity and produce medical isotopes. In order to bring about a constructive interaction, we have declared our readiness for fuel swap, provided it is done within the country (Iran), Foreign Ministry spokesman Ramin Mehmanparast said. We are prepared for a fuel swap even though we do not regard this condition of supplying fuel to the Tehran research reactor through a swap as correct. The International Atomic Energy Agency (IAEA) said in a report last week that Iran may now be working to develop a nuclear-armed missile, providing further grist to Western countries hoping to persuade China, which has UN Security Council veto power, to back harsher sanctions. But China, which has faced Western sanctions itself in the past, has resisted calls for tough measures against Tehran. We hope relevant parties can show flexibility to create conditions for completely and properly solving the Iran nuclear problem through diplomatic efforts, Foreign Minister spokesman Qin Gang told a news briefing on Tuesday. Mehmanparast said Iran had sent a letter to the IAEA declaring its readiness to cooperate in providing fuel for the Tehran reactor - an offer which is a non-starter for the West. A copy of the letter, seen by Reuters, said fuel stock at the reactor was approaching its end. Akbar Hashemi Rafsa-njani, a key figure in Irans ruling elite, rallied support around Supreme Leader Ayat-ollah Ali Khamenei and the government in Irans twin conflict with domestic dissenters and foreign powers over the nuclear issue. In recent mon-ths, followers of President Mahmoud Ahmadinejad criticised former president Rafsa-njani for failing to give Khamenei unswerving support against the protest movement. Our focal point is clear and that is the constitution, Islam, the principle of the office of the jurisprudent and supreme leadership, Rafsanjani told the powerful Assembly of Experts, which he heads.