Mr Blair said there could be a new “partnership” with Iran if it stopped supporting terrorism in Iraq and gave up its nuclear ambitions. Syria and Iran could choose partnership or isolation, he said.

The Prime Minister tried to exploit moves in Washington to rethink strategy on Iraq by holding out the prospect of engagement with two countries once dubbed by President Bush as part of the “axis of evil”. For the first time he also explicitly ruled out military action against Iran.

And, in words clearly directed at Mr Bush as he prepares for his final two years in power, Mr Blair called for the United States to lead a new drive towards peace in the Middle East, including peace in Palestine and the Lebanon, arguing that ultimately it was the only way to defeat al-Qaeda.

Downing Street denied suggestions that Mr Blair was going “cap in hand” to Damascus and Tehran asking for help and insisted that they were being told that they had to make a “strategic choice” between giving up support for terrorism and nuclear ambitions in return for being brought in from the cold.

It added that Mr Blair was repeating the message that he first gave in a speech in Los Angeles in July.

But, with Mr Blair speaking tomorrow to the Iraq Study Group, which is looking at alternative solutions for Iraq including involving its neighbours, his speech to the Lord Mayor’s banquet at Guildhall this evening was different in tone and suggested that he wants to capitalise on the new mood in Washington. Mr Bush has been opposed to talk with Iran.

Mr Blair said that Iran’s “genuine fear” that America sought a military solution was “entirely misplaced”. It did not, he said bluntly.

Mr Bush ducked any direct confrontation with Mr Blair, saying that he had not read the speech. But, in a White House press conference alongside Ehud Olmert, the Israeli Prime Minister, he gave warning against cracks appearing in the united front with which the West has approached Iran.

“I think it’s very important for the world to unite with one common voice to say to the Iranians that, if you choose to continue forward, you’ll be isolated,” Mr Bush said.

Although Robert Gates, the new US Defence Secretary, is also among those who have advocated a more open approach to Iran, Mr Bush said that the regime’s nuclear ambitions were a “threat to world peace” and went on to discuss the prospect of economic sanctions against the regime.

Mr Blair said that the choice for Iran was clear. “They help the Middle East peace process, not hinder it; they stop supporting terrorism in Lebanon or Iraq and they abide by, not flout, their international obligations. In that case, a new partnership is possible. Or, alternatively, they face the consequence of not doing so: isolation.”

The Prime Minister still hopes to persuade the US to engage fully in the Palestinian-Israeli peace process, but frustrated British diplomats in Washington say that the White House shows no real sign of being interested in the subject. Mr Bush yesterday said that he had discussed with Mr Olmert the two-state solution and the need for the Palestinian government to embrace the principles behind the road map for the Middle East peace process, but made it clear that their talks had focused on Iran and Iraq.

Earlier yesterday, Mr Bush met the Iraq Study Group, led by former Secretary of State James Baker, to discuss its imminent report charting a possible new course for Iraq. The President said that he would not “pre-judge” their findings while his spokesman emphasised that, despite Democrat control of Congress, Mr Bush remained commander-in-chief.

Senior Democrats have begun talking openly about the prospect of bringing troops home within six months, while others have urged the president to negotiate a diplomatic solution with Iraq’s neighbours.

But Mr Bush also had harsh words for Syria, a country with which, unlike Iran, the US has diplomatic relations. The President said that Syria should stop interfering in Lebanon and “harbouring extremists” and must begin helping “this young democracy in Iraq succeed”.

Imad Moustapha, the Syrian ambassador to the United States, said that his country was willing to engage with Britain and America.

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