WASHINGTON, July 5 (Reuters) - U.S. Secretary of State Colin Powell said on Thursday the impetus for improving relations with Iran must come from Tehran, not Washington.

In an interview with Reuters, he rejected a suggestion by fellow Republican and former National Security Adviser Brent Scowcroft that the United States risks losing potential support from the younger generation of Iranians by not reaching out to them.

"There is a new generation of Iranians coming along that is interested in a better relationship with the West and that is straining under some of the restrictions" of the Islamic regime in Tehran, Powell said.

But he insisted: "I don't think that this generation will be lost, as you say, under any circumstances."

Young Iranians -- 60 percent are under 25 years of age -- are expressing their views, most recently by re-electing reformist President Mohammed Khatami in June by an overwhelming margin, he said.

Whether or not U.S. sanctions against Iran are lifted the voices of this younger generation "are now being heard and the United States will watch these developments carefully and measure our responses and measure our policies in light of the policies we see coming from Iran as a result of Mr. Khatami's victory," Powell said.

"And we will watch what he does with this victory," the secretary of state added.

Powell said reformist elements in Iran have "not yet produced a situation where it would be appropriate to not go forward with ILSA," the Iran-Libya Sanctions Act.

Some have suggested that if it could not lift sanctions, the administration might make a small gesture, like ending fingerprinting of Iranians visiting the U.S. But Powell said no such proposal had come before him.

ILSA was enacted in 1996 to discourage European and other foreign energy firms from investing in Iran and Libya. It gives the U.S. president the authority to bar or reduce imports of goods from countries which invest in Iran and Libya.

RENEWING SANCTIONS

ILSA is set to expire in August but renewal has overwhelming support in the U.S. Congress, which already has begun acting on the legislation.

Powell acknowledged, "it will be continued clearly," with the only question whether for two, three or five years. The administration, seeking leverage for President George W. Bush if he decides to alter the policy, wants a two year extension.

Scowcroft, national security adviser under former President George Bush when Powell was chairman of the Joint Chiefs of Staff, co-chaired a distinguished group of experts that recently concluded that U.S. sanctions on Iran was "counterproductive" and should be lifted.

In a related column in The Washington Post, Scowcroft said Iran's young generation has "no direct knowledge of the Iranian revolution and the difficulties with the United States that followed."

Hence "what is at stake for the United States is no less than the outcome of a struggle between the people of Iran and their harsh masters," he wrote.

Washington broke ties with Iran after Islamic fundamentalist students stormed the U.S. Embassy in Tehran and seized 52 American hostages during the 1979 Iranian revolution, holding them for 444 days.

Since then, U.S. concerns about Iranian support for terrorism, acquisition of weapons of mass destruction and attempts to sabotage the Mideast peace process have fueled American antipathy for Tehran.

Nevertheless, Khatami's 1997 election created high hopes that the hostility with Washington could be overcome.

Bush's predecessor, Bill Clinton, attempted to capitalize on this by offering a road map leading to normal U.S. relations with Tehran and taking other cautious steps, including lifting import bans on Iranian carpets, caviar and pistachio nuts.

But Tehran refused an official dialogue with Washington and subsequent moves, including a crackdown by Iranian hard-liners at home and what pro-Israel groups say is Tehran's increased support for Palestinians against Israelis, alienated many Americans.

It is unclear how long the United States can afford to keep Iran at arms length. Tehran has increasingly begun to shed its pariah status, with Europe and with many other nations. ENDS POWELL ON IRAN 7701