He also said that he was prepared to offer Iran economic incentives to stop its nuclear program, but warned that sanctions could be toughened if it refused.

“We need to ratchet up tough but direct diplomacy with Iran, making very clear to them that their development of nuclear weapons would be unacceptable, that their funding of terrorist organizations, their threats against Israel are contrary to everything we believe in,” Obama said.
“We are willing to talk to them directly and give them a clear choice and ultimately let them make a determination in terms of whether they want to do this the hard way or the easy way,” Obama told NBC’s “Meet the Press” program.

Dealing with Iran’s uranium enrichment program, which some Western countries say is being used to develop a nuclear bomb, will be one of the first foreign policy tests for Obama after he takes office on January 20.

Iran last month signaled it was expanding its nuclear enrichment program, a clear sign that it has no intention of bowing to Western pressure. Tehran says the program is purely for peaceful purposes to generate more electricity.

Iran said last week it did not believe U.S. policy would change under Obama. Washington, which cut ties with Tehran after the 1979 revolution that ousted the U.S.-backed shah, has been pushing hard to isolate Iran over its nuclear program.

He said his administration would work with international partners to present a set of carrots and sticks to encourage Iran to halt its nuclear development program.

“In terms of carrots, we can provide economic incentives that would be helpful to a country that despite being a net oil producer is under enormous strain, huge inflation, lot of employment problems,” Obama said, without specifying what form the incentives would take.

“But we also have to focus on the sticks. In order for us to change Iran’s behavior we may have to tighten up those sanctions.”

Iran’s refusal to stop enriching uranium, which can provide fuel for nuclear power plants or material for bombs if refined to a higher degree, has drawn three rounds of UN sanctions since 2006 as well as separate U.S. measures.

During a presidential debate with Republican rival John McCain in October, Obama said his administration would work to restrict gasoline imports to Iran, which suffers a shortage of refined fuel.