Dr Merkel, in a visit to Mr Bush's ranch in Crawford, also said on Saturday that she would consider cuts in her country's brisk trade flows with Iran, should other efforts fail to secure Teheran's cooperation over its nuclear programme.

'We were at one in saying that the threat posed through the nuclear programme of Iran is indeed a serious one,' she said, via a translator, at a joint news conference with Mr Bush.

'We both share this view, but we also were of the opinion that we think that this issue can be solved through diplomatic means; that the next step then, obviously, would be a resolution.'

The German leader said that she would wait for reports on Iran's nuclear activities from the European Union negotiator and the United Nations' atomic watchdog, before making a final decision on sanctions.

Britain, France, Germany, the United States, Russia and China are expected to meet on Nov19 to assess reports from EU foreign policy chief Javier Solana and International Atomic Energy Agency head Mohamed ElBaradei.

'If the reports remain unsatisfactory...we need to think about further possible sanctions,' Dr Merkel said.

She said that she would talk with German companies about 'further possible reductions' in commercial ties with Iran.

The West accuses Iran of seeking to develop a nuclear weapon, but Teheran says that its nuclear programme is purely to generate electricity.

Mr Bush alarmed some European allies last month when he said that a nuclear-armed Iran could lead to World War III. The Bush administration insists that it is committed to pursuing diplomacy with Iran, but also says that all options are on the table.

The US President's two-day meeting with the German Chancellor, which began on Friday at his Texas ranch, came just a few days after he met French President Nicolas Sarkozy.

The meetings marked new chapters in US relations with both nations, which had been bruised as Dr Merkel's and Mr Sarkozy's predecessors sparred with Mr Bush over the US-led invasion of Iraq.

Besides Iran, the talks at the ranch also covered issues such as Afghanistan, global warming and a planned conference on Middle East peace that Mr Bush is due to host in a few weeks in Annapolis, Maryland.

Dr Merkel has been pressing Mr Bush to accept mandatory caps on greenhouse gas emissions. But the US President instead favours voluntary steps towards a long-term goal, resisting tougher measures which he says would harm businesses.

Ahead of a UN-sponsored summit on global warming in Bali, Indonesia, next month, he gave no indication of a shift in stance, saying that he wanted to tackle climate change 'without ruining our economies'.

President Bush and Chancellor Merkel have a friendly rapport, which was underscored by his suggestion that she visit the ranch, an invitation which he usually reserves for his favourite world leaders.

REUTERS, ASSOCIATED PRESS