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WASHINGTON, July 2 (Reuters) - U.S. President George W. Bush said on Wednesday that diplomacy was the first option to address Iran's nuclear program, which he is concerned could be used to build a nuclear weapon, but he repeated that all options were on the table.

"I have always said that all options are on the table but the first option for the United States is to solve this problem diplomatically," he told reporters ahead of the G8 meeting in Japan next week.

Tensions have been flaring in recent days amid reports Israel is planning for a possible strike against Iran's nuclear facilities. That has sent crude oil prices near record highs and led U.S. officials to publicly criticize the reports.

Despite three rounds of U.N. sanctions, Iran has refused to stop enriching uranium, arguing it is for a civil energy program. Western powers last month presented Tehran with a package of economic and diplomatic incentives aimed at convincing Iran to halt its program.

"The best way to solve this diplomatically is for the United States to work with other nations to send a focused message and that is that 'you will be isolated and you will have economic hardship if you continue trying to enrich,'" Bush said.

His comments followed indications by Iranian Foreign Minister Manouchehr Mottaki on Tuesday that his country was open to negotiations with Western powers over the incentives package.

"We saw the potential for the beginning for a new round of talks," Mottaki said, according to the Washington Post, which also reported that he said he would write a formal response within the next "couple of weeks."

Those comments were met with some skepticism in Washington where State Department spokesman Sean McCormack said, "At this point, I guess I'll be value-neutral on that.

"They say they are going to react positively. We'll see. They haven't done so in the past," he told reporters. (Reporting by Jeremy Pelofsky and Arshad Mohammed, editing by David Alexander)

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