(Edits)

By Matt Spetalnick and Tabassum Zakaria

ABU DHABI, Jan 13 (Reuters) - U.S. President George W. Bush accused Iran on Sunday of threatening security around the world by backing militants and urged his Gulf Arab allies to confront "this danger before it is too late".

Iran said it rejected such efforts to isolate Iran among its Gulf neighbours, adding that "such policies of fooling the people in the region" had already fallen flat.

Speaking in Abu Dhabi, the third stop of his tour of Arab allies, Bush said Shi'ite Muslim Iran was the world's number one sponsor of terrorism and accused it of undermining peace by supporting the Hezbollah guerrilla group in Lebanon, Palestinian Islamist group Hamas and Shi'ite militants in Iraq.

"Iran's actions threaten the security of nations everywhere. So the United States is strengthening our longstanding security commitments with our friends in the Gulf and rallying friends around the world to confront this danger before it is too late.

"Iran is today the world's leading state sponsor of terror. It sends hundreds of millions of dollars to extremists around the world while its own people face repression and economic hardship at home," he said in his keynote speech.

Iran, which blames sectarian violence in Iraq on the U.S.-led invasion to topple Saddam Hussein in 2003, said Washington's efforts to isolate Tehran "fell flat".

"We advise them not to pursue such policies of fooling the people in the region," Foreign Ministry spokesman Mohammad Ali Hosseini told a news conference. His comments were translated into English by Iran's Press TV satellite station.

NUCLEAR AMBITIONS

The Bush administration has kept up a campaign of rhetoric against Iran, including accusing it of seeking a nuclear capability despite a U.S. intelligence report that concluded Iran had halted its nuclear arms programme in 2003.

Bush last year said a nuclear-armed Iran could mean "World War Three", and Washington is pushing for a third set of sanctions on Iran for refusing to halt enrichment work, as demand by the United Nations.

Highly enriched uranium can be used in bombs. Tehran says it wants nuclear technology for civilian reasons and agreed on Sunday to clarify remaining questions about its nuclear work in the next month, the U.N. nuclear watchdog said.

The International Atomic Energy Agency (IAEA) said in a statement Tehran also gave the watchdog's head, Mohamed ElBaradei, information about work to develop an advanced centrifuge able to enrich uranium much faster than the antiquated model it uses now.

But diplomats said Tehran was stalling.

"Answering questions about their past nuclear activities is a step, but they still need to suspend their enrichment and reprocessing activity. Another declaration is no substitute for complying with the U.N. sanctions," White House spokesman Gordon Johndroe said.

ElBaradei, who met top Iranian leaders over two days last week, is anxious to see the standoff between Iran and Western powers settled peacefully, a concern underscored by a U.S.-Iranian naval incident in the Gulf a week ago.

The United States says Iranian boats threatened its warships on Jan. 6 along the vital route for crude oil shipments from the world's biggest producing region.

Vice Admiral Kevin Cosgriff, commander of the Fifth Fleet, made it clear to Bush his forces took the incident "deadly seriously", White House spokeswoman Dana Perino told reporters.

During a stop in Israel at the start of Bush's Middle East trip last week, he warned Iran of "serious consequences" if it attacked U.S. ships and said all options were on the table.

Tehran has dismissed the incident as routine and accused the United States of exaggerating it for propaganda purposes.

"We exercised restraint and we very calmly announced that this was a routine procedure but they tried to ... raise this issue at the same time when Mr Bush was travelling to the region in order to paint Iran in a negative light," Iran's Hosseini told reporters. (Additional reporting by Fredrik Dahl in Iran, Writing by Elizabeth Piper, editing by Mary Gabriel)

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