WASHINGTON, (AFP) - The incoming administration of President-elect George W. Bush is prepared to "nuance" its policy toward Iran in an effort to encourage dialogue and possibly enhance commercial ties, Secretary of State-designate Colin Powell said Wednesday.

In remarks prepared for his confirmation hearing before the Senate Foreign Relations Commitee, Powell said differences between Washington and Tehran "need not preclude greater interaction, whether in more normal or increased dialogue."

"Our national security team will be reviewing such policies," he added.

Though he did not read those remarks aloud, he was later questioned about them and elaborated, saying that he believed moderates in the Islamic Republic needed to be encouraged.

"To the extent that we can nuance our policy in that regard, I think it serves our interest and the interests of the region," Powell said.

"We have serious problems in our relationship with Iran, I'm not going to minimize that," he stressed, noting longstanding US concerns about Tehran's support for terrorism, its pursuit of weapons of mass destruction and human rights abuses.

"But, at the same time, we can see in recent years that there is change happening," Powell said, referring to the election of reformist President Mohammad Khatami in 1997.

Should the Bush team make overtures to Iran they will be picking up on an initiative begun by outgoing President Bill Clinton and Secretary of State Madeleine Albright who last year eased some restrictions on the country.

The United States and Iran severed diplomatic relations following the Islamic revolution in 1980 but the Clinton moves toward rapprochement have been decried by Iran which has refused efforts to start a direct dialogue.

On Tuesday, Iranian Foreign Minister Kamal Kharazi called on Bush to make drastic changes in Washington's policy towards Tehran, describing Clinton's effort as a failure.

"The transition of power in the White House has presented an opportunity for the new administration to make changes in the failed US policies towards Iran," Kharazi said in an interview with the state news agency IRNA.

Though the Clinton administration realized this towards the end and announced a review of its Iran policy, no practical changes were made apart from some "insignificant" easing of sanctions on non-oil luxury products, he said.

"Sanctions, meddling with Iran's internal affairs, the freeze in Iranian assets in the US and other related policies are still in place," he said, adding that Clinton missed a "historic opportunity" for a breakthrough.