Mr Bush was greeted by Mrs Merkel as he arrived in Germany
US President George W Bush says he wants to pursue diplomacy to deal with Iran's controversial nuclear programme, but "all options are on the table".
Mr Bush and German Chancellor Angela Merkel said further sanctions against Iran were possible.
"The first choice is to solve it diplomatically and that's exactly what we're doing," Mr Bush said.
Mr Bush was speaking after talks in Germany and is now in Italy on what is likely to be his last tour of Europe.
His talks with Chancellor Merkel also covered Afghanistan, the Middle East peace process and the global issues of climate change and the cost of energy and food.
At their joint news conference in Meseberg, Mrs Merkel said: "We can't exclude further sanctions" against Iran, but they would have to be agreed in the UN Security Council.
"The last round [of sanctions] has to be put into effect," she added.
President Bush issues warning to Iran
On Tuesday, Mr Bush attended a summit with EU leaders in Slovenia, where they threatened Iran with further sanctions unless it suspended nuclear enrichment.
He said an Iran with a nuclear weapon would be "incredibly dangerous" to world peace.
Mr Bush is to meet Italian Prime Minister Silvio Berlusconi and Pope Benedict XVI in Rome on the latest leg of what is being seen as an eight-day farewell tour of Europe.
His arrival in Rome coincided with an anti-war march through the centre of the city to the American embassy.
The demonstration drew about 1,500 people and was peaceful - unlike a larger protest last year that saw scuffles between protesters and police.
The BBC's David Willey in Rome says the authorities are taking no chances and exceptional security precautions are in place around the residence of the American ambassador where the president is staying.
Protesters called for an end to the Iraq war and for troops to come home
A no-fly zone has been imposed over the city, tram and bus services have been diverted, and electronic devices will make it impossible to use mobile phones within a wide area while the president attends a series of official engagements within the city walls.
After meeting the Pope on Friday, President Bush will first travel to France and then to the UK.
During the trip, Mr Bush has held out the prospect of a global deal on combating climate change, which he said could be achieved by the end of his term in office in January.
As well as issuing its warning on Iran, the leaders at the Slovenia summit discussed the crisis in Zimbabwe, urging the UN to send monitors to the country to check on its human rights situation ahead of the 27 June presidential run-off.
They also called for urgent progress in talks for a world trade deal, which European Commission President Jose Manuel Barroso said would be good for developing countries.
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