But Mr Khatami, who was elected in the presidential elections in May, made it clear that Tehran is not yet ready to open an official dialogue with the American administration.

BBC correspondent Richard Lister reports on the US reaction to the interview (1'03")

In an interview with the American Cable News Network, CNN, he said: "Nothing should prevent dialogue and understanding between our two nations. [But] there is [still] a great mistrust between us."

In the first address by an Iranian leader to the people of the United States since the 1979 Islamic revolution, he said: "If negotiations are not based on mutual respect they will never lead to positive results."

Asked about the long-running hostage crisis at the US embassy in Tehran in 1979/1980, when US diplomats were detained by Islamic revolutionaries, Mr Khatami blamed "flaws" in American policy.

Mr Khatami has tried to distance himself from his Conservative predecessors

"This was a crying out of the people against a humiliation and inequality imposed upon them by the policies of the United States and others," he said, adding that Iran was now a modern democracy that obeyed international laws.

The hostage crisis led to the severing of ties with the US in 1980, the year after the Islamic revolution which ousted the US-backed shah.

Mr Khatami, a relative moderate, said Iranians did not harbour any ill will towards the American people.

But he said US actions such as the shooting down of an Iranian civilian airliner in 1988 by a US warship in the Gulf, which killed around 300 people, and a move by the US Congress to grant $20m to topple the Iranian government were considered "undermining and confrontational."

"Our objection is to the type of relationship where our nation is humilitated and oppressed," he said.