ElBaradei urges Iran to engage with U.S.

* ElBaradei urges Iran to 'grasp the hand' Obama is offering

* Potential for deal: no more centrifuges, no more sanctions

* It would be 'insane' for Israel to bomb Iran

(Adds Israeli deputy foreign minister from paragraph 11)

BERLIN, May 16 (Reuters) - Iran should engage with the United States and negotiate over its nuclear programme, Mohamed ElBaradei, chief of the International Atomic Energy Agency (IAEA), said in a magazine interview released on Saturday.

U.S. President Barack Obama is actively seeking to engage Iran on a series of issues, from its nuclear programme to Afghanistan.

"I advise my Iranian negotiating partners: grasp the hand that Obama is extending to you," ElBaradei told Germany's Der Spiegel magazine.

Asked what he meant exactly, the head of the U.N. nuclear watchdog added: "I think Freeze for Freeze is the next realistic step. The Iranians would install no more centrifuges, the West would forego further sanction measures. During this time, there would be intensive negotiations."

He was referring to the thousands of centrifuges Iran has installed, and is adding to, in order to enrich uranium.

Enriched uranium can be used in nuclear reactors or, if purified to a much higher degree, in an atomic bomb, although Iran denies it has any such intention.

The United Nations Security Council has imposed three rounds of sanctions on Iran for refusing to halt enrichment. Obama's administration has made clear that any overtures to Iran will be accompanied by ramped up sanctions if there is no cooperation.

It would be crazy for Israel to bomb Iran, ElBaradei added.

Israeli President Shimon Peres said earlier this month other options remained open if U.S. diplomatic engagement with Iran failed to halt its nuclear programme. Peres did not say what the other options might be but they are generally understood to include military action.

"It would be completely insane to attack Iran," ElBaradei said. "That would turn the region into one big fireball, and the Iranians would immediately start building the bomb -- and they could count on the support of the entire Islamic world."

Separately, Deputy Israeli Foreign Minister Danny Ayalon said in a speech that Israel would not, in his opinion, take action against Iran without coordinating with the United States.

"But we expect coordination on the part of the Americans with us," Ayalon added. "Iran, which has yet to cross the point of no return, can be stopped through diplomatic effort."

"Iran is a very weak country," he said. "They would not withstand real sanctions. Their banks and shipping companies are vulnerable. If the world would just handle them in a tough manner, imposing sanctions, then maybe we would not need military action." (Writing by Paul Carrel, editing by Matthew Jones)