Speaking to reporters after meeting Lebanese Prime Minister Saad Hariri, Merkel said: "I made clear that we are coming to the phase where there should be sanctions against Iran."

"Iran has not accepted the constructive offers we have made and has even rejected them," she added.

Merkel's comments came a day after French Foreign Minister Bernard Kouchner said the European Union was ready to impose unilateral sanctions as Western powers struggle to forge a consensus within the UN Security Council.

Germany is one of six powers negotiating with Iran over its nuclear programme, together with permanent, veto-wielding Security Council members the United States, China, Russia, Britain and France.

China, which recently replaced Germany to become Iran's biggest trading partner as a big buyer of its oil, is seen as less keen on fresh sanctions, while Russia has also expressed misgivings.

The West suspects Iran of secretly trying to develop nuclear weapons, a charge rejected by Tehran, which says its atomic programme is purely for civilian energy purposes.

In other remarks, Merkel sharply criticised Israel's decision to build new settler homes in east Jerusalem, calling it a "serious step back" in efforts to forge peace in the Middle East.

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