"The best diplomacy, effective diplomacy, is one in which all options are on the table," Bush said a day after the new intelligence assessment stoked the controversy over Iran's disputed program.

Iran said the US report had vindicated its stance, while UN atomic watchdog chief Mohamed ElBaradei said the document could help defuse tensions though he added Iran must step up cooperation with his agency, the IAEA.

Bush was adamant. "Iran was dangerous, Iran is dangerous and Iran will be dangerous if they have the knowledge necessary to make a nuclear weapon," he told a White House press conference.

The president called on US allies to step up pressure on Iran. "The best way to ensure that the world is peaceful in the future is for the international community to continue to work together to say to the Iranians we are going to isolate you."

The National Intelligence Estimate said US allegations about Iran's atomic goals had been exaggerated for at least two years, although it could have the capability to make a nuclear weapon by 2015.

Iranian Foreign Minister Manouchehr Mottaki, quoted by state IRNA news agency, said: "Looks like there are wise people in the United States who seek to find a way out of the predicament which US leaders have created, and this report might help that.

"If America corrects its past approach we welcome that."

International Atomic Energy Agency (IAEA) head ElBaradei, whose inspectors have been investigating Iran's nuclear drive for four years, called for immediate negotiations between Iran and its western critics.

"This new assessment by the US should help to defuse the current crisis," he said in a statement. "At the same time, it should prompt Iran to work actively with the IAEA."

But US Secretary of State Condoleezza Rice vowed to press ahead with tougher UN sanctions against Iran, saying the United States and the five other powers dealing with Iran must maintain their diplomatic pressure.

"There is time for diplomacy to work, but there isn't time to stop and say 'we don't need the diplomacy,'" Rice said.

A UN diplomat confirmed the six powers were expecting to soon begin work on drafting a resolution for new sanctions against Tehran to go before the UN Security Council.

"The political directors are still working on it," said one of the diplomats to the UN Security Council, asking to remain anonymous.

Germany and Britain both said the report had vindicated Europe's approach of embarking on negotiations offering carrot and stick incentives to Iran.

"The report confirms we were right to be worried about Iran seeking to develop nuclear weapons," said the spokesman of British Prime Minister Gordon Brown.

"It also shows the intent is there and the risk of Iran acquiring a nuclear weapon remains a very serious issue."

In October, Bush had sounded the alarm over Iran's nuclear drive, raising the specter of "World War III" or a "nuclear holocaust" if it obtained an atomic arsenal.

The US report, a consensus view of all 16 US spy agencies, said Iran appeared "less determined to develop nuclear weapons than we have been judging since 2005."

It concluded that "the program probably was halted primarily in response to international pressure (which) suggests that Iran may be more vulnerable to influence on the issue than we judged previously.

"But we do not know whether it currently intends to develop nuclear weapons," cautioned declassified findings of the estimate, which starkly contradicted the US spy agencies' 2005 conclusions.

The assessment said US agencies had "moderate confidence" that Iran would be able to produce enough enriched uranium for a weapon sometime between 2010 and 2015.

In a swift reaction to his Tuesday speech, Democratic White House hopefuls accused Bush of "saber-rattling" and argued the new report rendered his hawkish policy obselete.

"He should seize this opportunity and engage in serious diplomacy using both carrots and sticks," frontrunner Hillary Clinton said.

Iran's arch-foe Israel gave the intelligence report a frosty reception, with Defence Minister Ehud Barak telling army radio that "Iran is probably continuing its program of fabricating a nuclear bomb."

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