* Merkel: a political solution still possible
* U.N. atomic watchdog to hold more talks with Iran
* U.N. wants a confidence-building step
BRUSSELS/VIENNA, Sept 17 (Reuters) - EU foreign policy chief Catherine Ashton will meet Iran's chief nuclear negotiator on Tuesday, Ashton's office said on Monday, as German Chancellor Angela Merkel said a political solution was still possible in the stand-off over Tehran's atomic programme.
The head of the U.N. atomic watchdog, Yukiya Amano, also said on Monday that his agency would hold more talks with the Islamic state aimed at allaying Western concerns that Iran is attempting to develop nuclear weapons, a charge Tehran denies.
Ashton will meet Iran negotiator Saeed Jalili in Istanbul as "part of continuing efforts to engage with Iran," after talks between world powers and Iran in Moscow in June failed to secure a breakthrough in the dispute.
"While it is not a formal negotiating round, the meeting will be an opportunity to stress once again to Iran the need for an urgent and meaningful confidence-building step," and to show more flexibility with proposals put forward by world powers in earlier talks, Ashton's spokeswoman said.
Several weeks after the failed Moscow talks, U.S. Secretary of State Hillary Clinton said, "The proposals we have seen from Iran thus far within the P5+1 negotiations are 'nonstarters.'"
U.S. State Department spokeswoman Victoria Nuland said the purpose of the Ashton-Jalili meeting was to gauge whether the Iranians were willing to offer any new proposals.
"That's the question that we have. We made clear that what they had put on the table was a nonstarter. Are they prepared to bring anything new?" Nuland told reporters in Washington.
She added that the major powers - the five permanent members of the U.N. Security Council plus Germany - were expected to meet in New York later this month on the sidelines of the U.N. General Assembly to discuss Iran.
As diplomatic efforts to solve the dispute have stalled, Israeli Prime Minister Benjamin Netanyahu has gone public with a demand that the United States set "red lines" that Iran not cross or risk military action. The United States has refused to set such triggers, though both it and Israel have said they reserve the right to take military action if necessary.
Merkel told a news conference in Berlin that Iran posed a threat not just to Israel but to the whole world, but added: "I support a political solution ... and I believe that we are not at the point where the search for political solutions has been exhausted."
International Atomic Energy Agency chief Amano said the U.N. agency, which is investigating Tehran's atomic activities, was "firmly committed" to intensifying dialogue with the Islamic state despite the lack of progress.
Amano, addressing his organisation's annual member-state gathering in Vienna, gave no date for a possible new talks between IAEA officials and Iran, which says its nuclear programme is for peaceful purposes. The last meeting was in August.
But Iran's atomic energy agency chief Fereydoun Abbasi-Davani accused the U.N. watchdog of a cynical approach and mismanagement when he addressed the gathering.
He suggested that "terrorists and saboteurs" might have infiltrated the agency, and that it was influenced by "certain states", a clear reference to Tehran's Western foes.
Iran's relations with the IAEA have become increasingly strained in recent years as the agency has voiced growing concern about possible military dimensions to Tehran's nuclear programme. But Abbasi-Davani's outburst was unusually strong in such an international forum.
The European Union reiterated its demand in a statement at the gathering that Iran must suspend uranium enrichment - something the Islamic state has repeatedly rejected.
That demand is in a series of U.N. Security Council resolutions approved since 2006.
The IAEA has been trying to reach a framework accord with Iran that would allow the Vienna-based U.N. agency to resume a long-stalled investigation into suspected atom bomb research in the Islamic Republic.
"We will continue negotiations with Iran on a structured approach to resolving all outstanding issues," Amano said, referring to such a pact. "I hope we can reach agreement without further delay, to be followed by immediate implementation."