Iran yesterday spurned proposals by six world powers in Baghdad calling on it to relinquish the most worrying components of its nuclear programme in return for modest incentives that offered little immediate relief from choking sanctions.
Nonetheless, Tehran agreed to another round of talks in Moscow next month.
Despite wide differences, all parties simply have too much interest vested in a diplomatic solution to let negotiations collapse just a month after they were revived in Istanbul following an increasingly tense 15-month impasse.
Catherine Ashton, the EU foreign policy chief, said that the talks were showing progress and "that there is some common ground".
"However, significant differences remain," she told reporters. "We do agree on the need for further discussion to expand the common ground."
"Iran declared its readiness to address the issue of 20 per cent enrichment and came with its own five-point plan, including their assertion that we recognise their right to enrichment."
As fraught and gruelling talks spilt into an unscheduled second day in the Iraqi capital, where a sandstorm at the airport prevented negotiators leaving, Iran urged the powers to overhaul an offer they tabled on Wednesday.
Tehran also demanded answers to its own undisclosed counterproposals meant to ease concerns that its nuclear programme, which Tehran insists is solely peaceful, masks a covert drive to develop a weapons capability.
Optimists saw the snags as part of the cut-and-thrust of healthy negotiations where each side wants to get the most and give the least.
Iran portrayed the offer that had been put forward on Wednesday by the United States, Britain, France, Russia, China and Germany as woefully inadequate and "unbalanced".
Iranian officials complained the P5+1 was not operating on the principle of "reciprocity" agreed to in Istanbul, where concessions by one side would be matched simultaneously by ones of equal value by the other.
Wednesday's offer also failed to meet Iran's main demand: the suspension of EU and US sanctions targeting its vital oil and banking sectors that take effect at the end of next month but which already have battered the Iranian economy.
Iran also believes it deserves recompense for agreeing in principle on Tuesday to allow the UN's nuclear watchdog to restart its long-stalled investigation into suspicions that Iran has secretly worked on developing nuclear arms, a charge Tehran denies.
The P5+1's pivotal proposal was for Iran to immediately halt its attempts to enrich uranium to 20 per cent, a level of purification that is a few technological steps away from producing bomb-grade material.
The six powers also called for Iran to ship its stockpile of 20 per cent uranium out of the country and to shut down the virtually impregnable underground facility at Fordo, near Qom, where most of the enrichment to this level takes place.
It was understood the P5+1 would forgo seeking further UN sanctions if Tehran agreed to its offer, but would not give ground on existing ones until Iran makes further verifiably substantial concessions.
Other incentives offered by the six powers included easing restrictions on exports of spare parts for Iran's civil airliners - currently blocked by sanctions - and help with nuclear safety at civilian installations. There were also reports that the P5+1 raised the possibility of scrapping a ban, due to come into full effect in July, on oil tanker insurance for Iran.
Iran's official news agency on Wednesday night condemned the package as "outdated, not comprehensive and unbalanced".
"Remarks from the P5+1 seem to be echoing those of Israeli prime minister Benjamin Netanyahu," declared Fars.
The P5+1 offer might well be an opening gambit, deliberately setting out tough demands at the beginning in the hope that Iran will agree to negotiate over the terms in subsequent meetings. Ahead of the talks, one analyst said the six powers could even risk a "calculated failure" in Baghdad, knowing there would be further talks.
Both sides have strong incentives to keep the negotiations on track. Iran needs sanctions relief while Barack Obama, the US president, knows that a failure of the talks could bring an Israeli attack on Iran that could ignite a regional war and drive up oil prices, jeopardising his re-election bid.
Iran had signalled a willingness to compromise on 20 per cent uranium enrichment, saying it is only purifying to this level to fuel a medical research reactor producing medical isotopes for cancer patients. The P5+1 is prepared to supply the fuel plates for that facility if Iran complies with its offer.
Iran would also want formal acceptance of its right to a domestic fuel cycle, enriching uranium to 3.5 per cent to fuel civil nuclear reactors. The US has hinted it could agree to this as long as Iran accepts intrusive inspections to ensure no material is diverted to possible weapons use.
Iran's counterproposals are said to have included a call to widen the discussions to include subjects such as the conflict in Syria, whose regime is Tehran's only ally in the region. US officials want this round of talks to focus solely on Iran's nuclear programme.
Future negotiations will take place against the backdrop of sabre-rattling by Israel, which is deeply mistrustful of the talks and has threatened military strikes against Iran's nuclear facilities if it deems diplomacy to have failed.
Reuters yesterday said a report by the UN's nuclear watchdog agency in the next few days is expected to show that Iran has installed more uranium enrichment centrifuges at Fordo. If so, Iran has upped the stakes in a bid to bolster its bargaining hand by putting more "facts on the ground".
