U.S. sees hope in Iranian president-elect, but still cautious By Warren Strobel and Matt Spetalnick WASHINGTON (Reuters) - The Obama administration is signaling its hopes for an easing of nuclear tensions after Iranian President-elect Hassan Rouhani takes office, but holding off on substantive moves until the moderate cleric shows a willingness to negotiate seriously. Rouhani, a former nuclear negotiator and veteran of Iran's 1979 revolution who will be inaugurated on Sunday, has pledged domestic reforms and more international engagement, in an apparent break from President Mahmoud Ahmadinejad's policies. In one sign that the United States sees a glimmer of hope in Rouhani's June 14 election victory, the White House this week declined to publicly back tough new sanctions on Iran approved by the U.S. House of Representatives. U.S. officials say they still favor intense economic pressure to force Iran to halt what Washington and the European Union say is a nuclear arms program. But they argue for a pause in new measures to see if the Western-educated Rouhani may be interested in a nuclear deal. " (We) want to give the newly elected president a chance to engage substantively on the issue," said a senior administration official, speaking on condition of anonymity. U.S. officials, however, remain skeptical of a thaw, pointing to what they see as Tehran's failure to respond to President Barack Obama's 2009 offer of improved relations, and its continued enrichment of uranium that can be used to fuel a nuclear weapon. Iran says its nuclear program is for peaceful purposes. Actions will define how our policy moves ... There needs to be action which backs up that promise to engage," said a second senior official, who also spoke on condition of anonymity. "One hundred percent, the ball is now in Iran's court at this point," the official said. The United States and Iran have had no diplomatic relations since 1980, shortly after students and Islamic militants stormed the U.S. Embassy in Tehran. The two nations remain divided over myriad issues, from Iran's backing of Syrian President Bashar al-Assad to suspicions in Tehran that the "Great Satan" wants to overthrow the Islamic Republic. In a possible olive branch to the United States, Rouhani, said he intends to choose former U.N. ambassador Mohammed Javad Zarif as foreign minister. Zarif has been at the center of several informal efforts to overcome U.S.-Iranian estrangement. And Rouhani has called the chasm between Washington and Tehran an "old wound" that should be healed. In Washington, opinion divides sharply between those who argue for giving Rouhani a chance, and others who say he is merely a kinder face on an unchanged system ultimately controlled by Iranian Supreme Leader Ayatollah Ali Khamenei. Comparisons with the vitriolic Ahmadinejad were stoked on Friday when Iran's student news agency ISNA reported that Rouhani had said Israel is a "wound" on the Muslim world "and needs to be removed." Iran's state-run TV later said Rouhani had been misquoted. Iran's intent to develop a nuclear arsenal is evident. New president or not, I am convinced that Iran's supreme leader intends to continue on this path," Representative Ed Royce, chairman of the House Foreign Affairs Committee, said during debate on the new sanctions bill. The measure, which also needs Senate approval, passed overwhelmingly and includes a provision seeking to cut Iran's oil exports - crimped by existing sanctions - by an additional 1 million barrels per day within a year. Once Rouhani takes office and gets his team in place, Iran is expected to resume talks with the United States and other world powers. The group, known as the P5+1, in February offered Iran modest relief from sanctions in exchange for restrictions on its uranium enrichment. Karim Sadjadpour, an Iran expert at the Carnegie Endowment for International Peace, said Tehran's negotiating posture was "more flexible" during Rouhani's 2003-2005 tenure as nuclear envoy. Iran temporarily suspended its uranium enrichment program during that time. But now, "Rouhani's challenge is to conjure up a deal which is acceptable to both hardliners in Iran and the U.S. Congress. That's an extremely tall order," Sadjadpour said. The United States this week also reiterated its willingness to hold direct, one-on-one meetings with Iran. And Washington on July 25 slightly eased sanctions to allow more medical devices to be exported to Iran without special permission, in what some observers saw as a diplomatic signal to Tehran. U.S. officials portrayed the move as a tweaking of sanctions to ensure they don't block humanitarian goods. Any improvement in U.S.-Iran ties is likely to be incremental. One of the perennial challenges in U.S.-Iran relations is 'who makes the first move?' The U.S. isn't going to unilaterally remove sanctions, and Iran isn't going to unilaterally offer nuclear compromises," Sadjadpour said. Smaller steps aimed at building confidence are probably "the types of things the Obama administration is thinking about," Sadjadpour said. He added that Obama needs to carefully calibrate his approach to Rouhani or risk complicating the Iranian leader's domestic position: "U.S. overzealousness could hurt him in Tehran more than it helps him." Retired Marine General James Mattis, who was head of the U.S. military's Central Command until March, summed up the cautious official view of Rouhani's ascension to power. I don't believe he's a moderate but that would not moderate my support for engaging with him and exhausting all alternatives at this point. In other words, check and see if he can find some maneuver space," Mattis told a security forum in Colorado recently. So try it, talk with him, have very modest expectations. But at least try. Additional reporting by Phil Stewart and Anna Yukhananov; Editing by Paul Simao