By Caren Bohan

WASHINGTON, June 4 (Reuters) - Barack Obama toughened his terms for diplomacy with Iran and backed Israel's stance on Jerusalem on Wednesday in his first foreign policy speech since capturing the Democratic nomination for U.S. president.

He vowed to stop Iran from acquiring a nuclear weapon and insisted Jerusalem will remain the undivided capital of the Jewish state in a speech to the American Israel Public Affairs Committee (AIPAC), a pro-Israel lobby group.

Obama, who clinched the nomination late on Tuesday, has faced some wariness among Jewish voters over his commitment to Israel, buoyed in part by a rumor campaign suggesting he is a Muslim and that his advisers have a pro-Arab bent.

Obama, a Christian, vowed in his speech to work for peace with a Palestinian state alongside Israel. His campaign has tried to dispel suggestions he might pressure Israel in negotiations more than his rival, Republican Sen. John McCain.

"Let me be clear. Israel's security is sacrosanct. It is non-negotiable. The Palestinians need a state that is contiguous and cohesive, and that allows them to prosper," Obama said.

"But any agreement with the Palestinian people must preserve Israel's identity as a Jewish state, with secure, recognized and defensible borders. Jerusalem will remain the capital of Israel, and it must remain undivided," he said.

Israel calls the city its undivided and eternal capital, but this status has never been recognized internationally. Palestinians want East Jerusalem, captured by Israel at war in 1967, for a future capital.

The issue is central to the negotiations President George W. Bush hopes to conclude before he steps down in January.

Obama alluded to the rumor campaign in his speech telling his audience they may have received e-mails telling "tall tales" about him.

IRAN AN ISSUE

"All I want to say is -- let me know if you see this guy named Barack Obama, because he sounds pretty frightening," joked Obama, appearing upbeat and energetic after securing the nomination in a battle with fellow Democrat Hillary Clinton.

McCain has been assailing Obama in recent weeks on his previous statements suggesting a willingness to talk directly to Iranian President Mahmoud Ahmadinejad, who has called for Israel to be wiped off the map.

Obama has since said he would not guarantee a meeting with the Iranian president. He went a step further in the AIPAC speech by laying down conditions for what he said would "tough and principled diplomacy" with Tehran.

"There will be careful preparation. We will open up lines of communication, build an agenda, coordinate closely with our allies, and evaluate the potential for progress," Obama said.

"I have no interest in sitting down with our adversaries just for the sake of talking," he said.

"But as president of the United States, I would be willing to lead tough and principled diplomacy with the appropriate Iranian leader at a time and place of my choosing if and only if it can advance the interests of the United States."

Obama said the danger from Iran in the Middle East was "grave."

"I will do everything in my power to prevent Iran from obtaining a nuclear weapon, everything in my power to prevent Iran from obtaining a nuclear weapon -- everything," he said to a standing ovation.

The McCain campaign has taken aim at Obama for what it says is a pattern of "flip-flops" in his positions on Iran.

McCain addressed the AIPAC conference on Monday and promised to pursue tougher financial sanctions on Iran if he won the presidency. He also called for a worldwide divestment campaign against Iran aimed at curbing its nuclear ambitions.

Also speaking at the AIPAC conference was Clinton, who has not yet conceded the race and voiced strong support for Israel in her own remarks.

(Editing by Howard Goller)

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