President-elect Barack Obama should seek tougher sanctions against Iran, which will be his biggest Middle East challenge, outgoing White House national security adviser Stephen Hadley said on Wednesday.

In a speech at the Center for Strategic and International Studies, Hadley also said the Bush administration had laid the groundwork for progress toward Palestinian-Israeli peace, despite the fighting in Gaza.

The Middle East will be only one on a list of foreign policy challenges facing Obama when he takes office on January 20 amid the continuing U.S. wars in Iraq and Afghanistan. Other regions such as Russia, Pakistan and North Korea will also require early efforts by the new president, Hadley said.

"For the next administration, the biggest challenge in this region is Iran," Hadley said in a speech looking back on President George W. Bush''s foreign policy.

"Negotiations with Iran, as some have proposed, without leverage on Iran will not produce a change in Iranian behavior or advance U.S. interests," he said.

Obama has said he may be willing to reverse Bush''s policy by offering direct talks with Iran. He would offer economic incentives for Tehran to stop its nuclear program but has also warned that sanctions could be toughened if Iran refused.

"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" in December.