Iran "not close" to nuclear weapon: Gates

The challenge, Gates said, is finding a balance between sanctions to pressure Iran and incentives for engagement with the United States and Europe. A sharp decline in oil prices since last year increases the chances for a resolution. "There are economic costs to this program; they (the Iranians) do face economic challenges at home."

MULLEN TALKS OF 'VERY BAD OUTCOME'

U.S. spy agencies believe Iran lacks enough weapons-grade uranium to make a bomb, but cannot rule it out, Adm. Dennis Blair, the U.S. director of national intelligence, told Congress last month.

"Iran probably has imported at least some weapons-usable fissile material but (we) still judge it has not obtained enough for a nuclear weapon," he said. "We cannot rule out that Iran has acquired from abroad or will acquire in the future a nuclear weapon or enough fissile material for a weapon."

He reiterated a view that Iran was undertaking two of three activities needed for a nuclear arms program -- developing uranium-enrichment technology and nuclear-capable ballistic missile systems. U.S. intelligence agencies have said Iran suspended developing a nuclear warhead, the third activity.

"Iran having nuclear weapons, I've believed for a long time, is a very very bad outcome -- for the region and for the world," Mullen said.

CIA Director Leon Panetta last week declined to discuss any possible new U.S. policies being considered in this area, saying this is classified.

(Additional reporting by Randall Mikkelsen; Editing by Randall Mikkelsen and Doina Chiacu)