DUBAI, March 27 (Reuters) - The United Arab Emirates, a key U.S. ally, said on Tuesday it would not be involved in any military strike on Iran, but urged the Islamic Republic to avoid regional tensions.

"The UAE is an independent and sovereign state that rejects the use of its territories, air or regional waters to attack any country, especially if it is a neighbour and Muslim," President Sheikh Khalifa bin Zayed al-Nahayan told Arab newspaper al-Hayat.

"We have informed the Iranian brothers ... that we are not party to its conflict with the United States and will not allow our territories to be used for any military, security or spy activities against it."

In January the UAE denied reports that the United States had set up an office in the UAE city of Dubai to monitor Iran which fuelled concerns over ties between the two neighbours.

The United States has a large military base in nearby Qatar and its Fifth Fleet is stationed in Bahrain.

The U.N. Security Council tightened sanctions on Iran on Saturday over its refusal to halt uranium enrichment which the West suspects is aimed at developing nuclear weapons.

Iran immediately rejected the measure, saying its nuclear programme was peaceful. But the standoff between the Islamic Republic and the international community has raised fears among many Gulf Arabs of a military escalation in region.

Sheikh Khalifa urged Iran to show flexibility in its relations with the West to avoid tensions in the region.

He also called on the United States and other powers to pursue diplomatic channels and avoid military action.

"We repeat our call to (Iran) to be flexible and realistic and to respect international demands and implement (Saturday's) resolution 1737 to avert any more tension in the region," he said.

The UAE and Iran have full diplomatic ties and strong trade links despite a three-decade dispute over three islands in the Gulf.

The UAE and its fellow Gulf Arab states agreed in December to start planning their own peaceful nuclear programme.

Gulf Arab states say they are planning for when their oil and gas reserves begin to run out but analysts are concerned about an atomic arms race with non-Arab Shi'ite Iran.

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