Hillary Clinton, President-elect Barack Obama's choice for secretary of state, told a Senate confirmation hearing that it sought diplomatic engagement with Iran -- which lies at the heart of US policy stakes in the Middle East.

The outgoing administration of President George W. Bush refused to engage in direct negotiations with Iran unless it first stops enriching uranium, material which Washington fears could be used to build an atomic bomb.

"The incoming administration views with great concern ... Iran's sponsorship of terrorism, its continuing interference with the functioning of other governments, and its pursuit of nuclear weapons," she said.

Along with Syria, Iran backs the Islamist Hamas in the Gaza Strip -- which is being pounded by the Israeli army in an 18-day military offensive -- as well as Hezbollah in Lebanon, which fought a similar war with Israel in 2006.

Washington also accuses Iran of meddling in Iraq and Afghanistan.

"We are not taking any option off the table at all," Clinton told senators in a question-and-answer session as she alluded to the potential use of military action.

"But we will pursue a new, perhaps different approach" that will serve as the cornerstone of what the Obama administration believes "is an attitude toward engagement that might bear fruit," Clinton said.

Even though the new administration had "no illusions" about the fresh approach, one had to be tried because "what we've tried has not worked," Clinton told the Senate Foreign Relations Committee.

"They are closer to nuclear weapons capacity today than they were," she said.

The United States has had no diplomatic relations with Iran since after the Iranian Islamic revolution in 1979 and the seizure of hostages at the US embassy.

In her opening remarks, Clinton drew a link between Iran's anti-US and anti-Israeli attitude and US goals for regional peace and stability.

She called for a "strategy of smart power in the Middle East that addresses the security needs of Israel and the legitimate political and economic aspirations of the Palestinians."

Clinton hoped it "effectively challenges Iran to end its nuclear weapons program and its sponsorship of terror."

She said the new strategy also could "persuade both Iran and Syria to abandon their dangerous behavior and become constructive regional actors."

And she sais she hoped it "strengthens our relationship with Egypt, Jordan, Saudi Arabia, other Arab states, along with Turkey and our partners in the Gulf, to involve them in securing a lasting peace in the region."

Iran has long called for a "grand bargain" that tackles a broad range of issues in the Middle East.

In making her appeal, Clinton sought to weigh the concerns of Israelis against those of the Palestinians as Arab and Muslim anger mounts over a Bush administration perceived to be overwhelmingly biased in favor of Israel.

"The president-elect and I understand and are deeply sympathetic to Israel's desire to defend itself under the current conditions, and to be free of shelling by Hamas rockets," Clinton said.

"However, we have also been reminded of the tragic humanitarian costs of conflict in the Middle East and pained by the suffering of Palestinian and Israeli civilians."

But she repeated the Bush administration's opposition to negotiations with Hamas, which it labels a terrorist organization, unless it recognizes Israel, renounces violence and abides by past peace deals.

"That is just for me an absolute," Clinton said.

The former first lady and presidential candidate said the war in Gaza had underscored her and president-elect Obama's determination to seek a just and lasting peace deal with the US-backed Palestinian Authority of Mahmud Abbas.

"We will exert every effort to support the work of Israelis and Palestinians who seek that result."

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