Foreign Secretary Jack Straw has appealed to the Iranian people - saying he wants to help them have a freer and more prosperous future.
Mr Straw's speech may mark a shift in Britain's approach to Iran
In a speech in London Mr Straw said the Iranian people "deserved better" than their current government.
International agencies should publish more reports in Farsi on the internet to help reach the Iranians, he said.
The UN Security Council is to discuss Iran's nuclear programme but Mr Straw says military action is inconceivable.
He refused to comment directly when asked by the BBC's Frank Gardner about contingency plans being drawn up by US military chiefs about possible strikes on Iranian targets.
Mr Straw told the International Institute for Strategic Studies Iran policies risked damaging its reputation and relations with the rest of the world.
"Iran and the Iranian people deserve better," he declared.
Mr Straw said foreign investors were already looking elsewhere and bright young Iranians were leaving the country.
Such problems were likely to be made worse if there was a protracted situation between Iran and the UN, he said.
The foreign secretary said he was not in favour of "regime change" in Iran, and any change in government had to "come from within".
'Not too late'
UN nuclear watchdog the International Atomic Energy Agency last week referred Iran to the UN Security Council after months of growing tension over the country's nuclear programme.
The security council starts talks this week and has the power to impose sanctions.
Mr Straw told BBC Radio 4's Today programme Iran was "very, very sensitive" to the prospect of referral to the Security Council.
Tehran had repeatedly miscalculated by thinking it could split the UN, he said.
But the involvement of the Security Council did not mean efforts to find a negotiated solution were over, he said.
Mr Straw renewed his claim that military action against Iran was inconceivable.
"This is not Iraq for a moment ... This is an issue that has to be resolved, yes by pressure, but by peaceful and democratic means," he said.
"Although no American president is ever going to theoretically rule out any option, in practice military action is not on the Americans' agenda."
He said Iran was a voluntary signatory to the nuclear non-proliferation treaty and if could seriously destabilise the Middle East if it developed nuclear weapons.
US President George W Bush on Monday added to pressure on Iran, saying some of the most powerful homemade bombs used against American troops in Iraq included parts from Iran.
Iran has vowed to resist international pressure, insisting it has the right to civilian nuclear technology. It denies US and EU accusations that it is seeking to develop nuclear weapons.
On Sunday, Iran said Moscow's compromise proposal on its nuclear programme was "off the agenda" after the security council referral.
But ministry spokesman Hamid Reza Asefi said his country was still open to negotiations with Russia, as long as Iran's right to conduct nuclear fuel research on its own soil was recognised.
Russia had sought to persuade Iran to move its enrichment programme to Russian territory, which would allow closer international monitoring.
During his BBC interview Mr Straw also defended fellow Cabinet minister, Culture Secretary Tessa Jowell, after it emerged she had chosen not to attend Cabinet talks on Iran since 2003 due to her husband's business dealings.
The foreign secretary said occasionally ministers had to absent themselves from discussions because of a potential conflict of interest which may arise from their spouse's activities.
"That is provided for by the ministerial code. Tessa, to my absolutely certain knowledge, acted promptly and properly," he said.
The prime minister's official spokesman added that the culture secretary had "absented herself voluntarily".