US Vice-President Dick Cheney has renewed a warning that the use of force could be an option if Iran continues to defy the West over uranium enrichment.
Mr Cheney, speaking in Australia, said diplomacy was the preferred course.
But in a newspaper interview he backed US Senator John McCain's view that the only thing worse than a military clash would be an Iran with nuclear arms.
Iran insists that its nuclear programme is for peaceful purposes only.
Mr Cheney, a noted hawk in the Bush administration, endorsed Mr McCain's stance in an interview with The Australian daily newspaper.
And speaking at a joint news conference with Australian Prime Minister John Howard, he also spoke of US concerns about Tehran's nuclear ambitions and warned that "all options are on the table" in terms of how the US would respond.
"They have made some fairly inflammatory statements," he said. "They appear to be pursuing the development of nuclear weapons."
Mr Cheney spoke of concern at Iran's "fairly aggressive" role in the Middle East, and its flouting of a UN deadline to stop uranium enrichment.
Permanent UN Security Council members and Germany will meet on Monday to discuss further sanctions against Iran following its decision to ignore last Thursday's deadline.
On Friday, Iranian President Mahmoud Ahmadinejad said Iran will defend its nuclear programme to the end, and must not show weakness "in front of the enemy".
"The Iranian people are vigilant and will defend all their rights to the end," Iranian news agency Isna quoted Mr Ahmadinejad as saying, at a rally in northern Iran.
POSSIBLE NEXT STEPS
New UN resolution on tougher economic sanctions, tabled by US or European allies
US pressure on Europeans to step up bilateral sanctions
New initiative to get Iran back to talks
"If we show weakness in front of the enemy the expectations will increase but if we stand against them, because of this resistance they will retreat."
The IAEA concluded in a report on Thursday that Iran was expanding rather than halting its enrichment programme, defying a UN resolution of December 2006.
Iran says the UN call for it to stop uranium enrichment is unacceptable as it has no legal basis.
Tehran denies Western claims it is secretly trying to build nuclear arms, saying its nuclear programme is for purely peaceful, energy-producing purposes.
While enriched uranium is used as fuel for nuclear reactors, highly enriched uranium can also be used to make nuclear bombs.
Australia is a key member of the US-led coalition in Iraq, with about 1,400 troops in and around the country.
Speaking after his meeting with Mr Cheney, Mr Howard warned of the possibility of Iran's influence in the Middle East region growing if coalition troops are pulled out of Iraq too soon.
He told reporters that instability in Iraq resulting from an early coalition withdrawal could tip the regional power balance in Iran's favour, with disastrous consequences:
"I think Iran would benefit enormously from that and that would be to many in the Middle East, not just the Israelis, that would be a nightmare scenario."