U.S. says diplomacy is focus in Iran efforts

WASHINGTON (Reuters) - The United States has not exhausted all diplomatic options against Tehran, a senior U.S. official said on Wednesday, adding that Iran had made only "modest" progress in its nuclear program due to U.N. sanctions.

"We view force as an option that is on the table but a last resort," said U.S. Under Secretary of State for political affairs William Burns. "We do not believe we have exhausted all the diplomatic possibilities."

Burns, testifying on Iran to a congressional panel, said the costs would be high to Tehran if it continued on its current course. But he appeared to play down the immediate threat from a nuclear program that the West believes is to develop an atomic bomb but that Tehran says is for purely civilian energy purposes.

"While Iran seeks to create the perception of advancement in its nuclear program, real progress has been more modest," he said.

"It is apparent that Iran has not yet perfected enrichment (of uranium), and as a direct result of U.N. sanctions, Iran's ability to procure technology or items of significance to its missile programs, even dual-use items, is being impaired."

His testimony came amid increased tensions with Iran, which on Wednesday test-fired nine missiles it said could reach Israel and U.S. assets, and warned Washington and Israel it was ready to retaliate for any attack over its nuclear projects.

Defense Secretary Robert Gates said Washington was no closer to confrontation with Iran following the missile test.

"There is a lot of signaling going on. But I think everybody recognizes what the consequences of any kind of a conflict would be," the Pentagon chief told reporters.

U.S. Democratic presidential candidate Barack Obama called Iran a "great threat" and called for cooperation with allies to tighten pressure on Tehran. His Republican opponent, John McCain, voiced support for a planned missile shield to counter Iran.

The nuclear dispute, hostile rhetoric and speculation about a possible confrontation with Iran have roiled oil markets. Earlier on Wednesday, crude oil prices rose more than $2 after Iran, the world's fourth largest oil producer, test-fired its missiles.

Burns, the State Department's lead person on Iran, cautioned that if Tehran continued to refuse to give up its sensitive enrichment work there would be further consequences.

"Any continuation on its present course will entail high and increasing costs for Iran," Burns told the House of Representatives foreign affairs committee, without providing specifics.

IRAN WANTS 'COMMON GROUND'

Major powers offered Iran a revised package of incentives last month, including help to develop a civilian nuclear program, if Tehran gives up its nuclear work.

The Iranian government's formal response has not been made public. But Burns said Iran's written and oral reply so far indicated it wanted "common ground."

"We will see if the Iranians are serious," said Burns, who declined to provide any specifics of the Iranian response.

Several Republican lawmakers criticized Burns for apparently playing down the threat from Iran and pointed to Wednesday's missile testing.

Rep. Gary Ackerman, a Democratic lawmaker from New York, said the administration needed to put more pressure on nations like Switzerland which were doing financial deals with Iran.

Others argued the Bush administration should be talking to Tehran, as it has with other adversaries, such as North Korea.

Iran and the United States cut diplomatic ties shortly after the Iranian revolution of 1979.

The United States is looking at opening up a U.S. interests section in Tehran, which would be a sharp change in U.S. policy of isolating Iran. It would allow for diplomatic contact, while falling short of diplomatic ties.

"The idea of the interests section is an interesting one and is one that is worth looking at carefully. I cannot go beyond that," said Burns.

(Editing by Kristin Roberts and Frances Kerry)