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By Avida Landau and Rebecca Harrison

JERUSALEM, Dec 4 (Reuters) - Israel said on Tuesday it believed Iran had restarted its atomic weapons programme and that a U.S-backed campaign to curb Tehran's nuclear ambitions must continue despite a U.S. report it had halted the work.

"It is vital to pursue efforts to prevent Iran from developing a capability like this and we will continue doing so along with our friends the United States," Prime Minister Ehud Olmert told reporters, adding he had discussed the new U.S. intelligence report with Washington.

The assessment, released on Monday, said Iran's nuclear weapons programme was frozen in 2003 and remained on hold, contradicting an earlier report that the Islamic Republic was bent on building a bomb.

The report could undermine Washington's efforts to convince other world powers to agree on a third package of U.N. sanctions against Iran for defying demands to halt uranium enrichment.

Israeli Defence Minister Ehud Barak said the report was incomplete and that Israel's arch foe had probably restarted the programme and that such reports were "made in an environment of uncertainty".

"It seems Iran in 2003 halted for a certain period of time its military nuclear programme but as far as we know it has probably since renewed it," Barak told Army Radio.

"We are talking about a specific track connected with their weapons building programme, to which the American (intelligence) connection, and maybe that of others, was severed."

Tensions have escalated in recent months as Washington has ratcheted up the rhetoric against Tehran. U.S. President George W. Bush said in October a nuclear-armed Iran could lead to World War Three.

Israel says an Iranian nuclear weapon would pose a threat to the existence of the Jewish state and has been concerned by statements from Iran's president that the Jewish state should be "wiped off the map".

Israel is widely believed to have the only atomic arsenal in the Middle East, although it has never confirmed or denied that.

Iran, which says it wants nuclear technology only for civilian purposes such as electricity generation, welcomed the report and said it was becoming clear its plans were peaceful.

Washington says it wants to solve the Iran problem diplomatically while leaving military options on the table, and is pushing for tougher U.N. sanctions against Tehran. But it faces resistance from China and Russia. (Writing by Rebecca Harrison; Editing by Keith Weir)

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