Diplomats say Iran is ready to begin installing 3,000 centrifuges to produce enriched uranium after completing work at an underground facility.
Media reports quoting diplomatic sources say preparations are being made to install the centrifuges at Iran's plant in Natanz to produce nuclear fuel.
The reports say the revelation is based on findings by U.N. nuclear agency inspectors who visited Natanz this week.
Highly enriched uranium can be used to make atomic weapons.
The United States and its Western allies believe Iran is trying to develop nuclear weapons. Tehran denies the charge.
Meanwhile, U.S. Defense Secretary Robert Gates says the Iranians are - in his words - "overplaying their hand" and have raised concern in the Middle East and beyond about their intentions.
Gates spoke Thursday in Bahrain. He said he made the remark to the leaders of Saudi Arabia and Qatar during his tour this week of Gulf Arab nations.
Gates also said there are many courses of action that do not involve an open military conflict with Iran.
In Tehran, Iranian President Mahmoud Ahmadinejad lashed out at domestic critics of his policies in the international standoff on Iran's nuclear program. He vowed to press ahead with Tehran's nuclear program.
Some information for this report was provided by AFP, AP and Reuters.