• This is a rush transcript from "Your World with Neil Cavuto," May 21, 2007. This copy may not be in its final form and may be updated.

    NEIL CAVUTO, HOST: Well, Lebanon waking up to a very real Al Qaeda threat in its own backyard. So how will this play out in the region? With us now is a man who watches this very, very closely, former Israeli Prime Minister Benjamin Netanyahu. Prime Minister, good to have you.

    BENJAMIN NETANYAHU, FORMER ISRAELI PRIME MINISTER: Good to be back.

    CAVUTO: What do you make of the fact that the government is responding much more forcefully this time than it did the Hamas uprisings a year ago?

    NETANYAHU: They know what they are going to get. They already have one strain of militant Islam, the Iranian-backed Shiite Hezbollah. Now they will get the other strain, which is the Sunni radicals of Al Qaeda really competing with each other on the ground of Lebanon. So they have had it bad enough with Hezbollah, I think they recognize that they want to nip this Al Qaeda insurgency when it’s in the bud.

    CAVUTO: All right. What if they cannot or do not?

    NETANYAHU: Then Lebanon succumbs to the militant Islam in this country that was once called the Switzerland of the Middle East, the Switzerland of the Arab world. It goes down. This is really a microcosm of the larger battle we are all fighting, Israel, the Arab countries, the world really.

    It is the battle of moderation in the 21st Century in the Arab and Muslim world against militant Islam, which seeks to submerge all of us in this hail of fire and fanaticism. And I think it is right to take the stand now. It is a bit late for most of the Arab countries; it is a bit late for Lebanon, but better late than never.

    CAVUTO: All right. Now if Al Qaeda has this influence in Lebanon, and now we know that Al Qaeda elements were behind this seizing of American troops and killing of some troops last week, and yet there is a move in this country to disassociate itself from Al Qaeda connections in Iraq, saying that they are overstated. What do you think?

    NETANYAHU: I think that the larger issue in the Middle East is — that overshadows Iraq too, is whether the principle militant Islamic power in the world, which is Shiite Iran, whether it gets the nuclear bomb or not. If it gets the nuclear bomb, then everything you have seen up to now will seem pale in comparison.

    And I think Iraq will fall and I think the Gulf could fall. I think they will make a grab for the world's oil supplies. And they have already openly said that they want to annihilate my country, Israel, with their nuclear weapons, and also reestablished this fantasy empire that they believe should stretch right through to Europe.

    Now this is the first non-deterrable nuclear power that could emerge in the world. It could be captive to some crazy ideology, really a ritualistic religious sect that has nuclear weapons. It is a frightening thought.

    And as I watch all of this, and I watch it with great concern, Iran is supporting Hamas in the south to send deadly rockets into our cities. And from the north in Lebanon, Hezbollah has destroyed a lot of south Lebanon, forcing us to respond, rocketed north of Israel. And now you have Al Qaeda.

    The real question is does the world wake up in time to prevent the spread of militant Islam? And that means first of all stopping Iran that also colludes with Al Qaeda.

    CAVUTO: All right. Now they are just leaving little doubt about that, right? Ayatollah Ali Khamenei had said today, the Islamic system of Iran detonated a powerful in the world of politics, which is thousands-fold stronger than the bomb detonated by the U.S. in Hiroshima. Essentially saying that our influence now is irrefutable and essentially taking pride in the fact that Iranian-backed elements are causing such hell for American soldiers in Iraq. What do you make of that?

    NETANYAHU: I make of it as a huge test for the world, not only for the U.S., for Europe, for the Middle East, for the Arab countries, for Israel. The real question is, do we stop Iran, that is in many ways on the back of all of this, including the Sunni militancy? Do you stop in time before it arms itself with nuclear weapons?

    CAVUTO: How far away do you think they are?

    NETANYAHU: They are about anywhere from two to four years away according to our published intelligence estimates. And we are not guessing this time, because all of us were guessing in the case of Iraq and at least our people were admitting that they were guessing.

    Here, Ahmadinejad, the ruler of Iraq, takes you on guided tours to his centrifuges, producing fissionable material. And he says, “You know, on such and such date, we make a bomb. It will be a peaceful bomb, we won't use it, we only promise to use it on select enemies and so on.”

    So he is announcing openly what it is they have in mind. Now we are forewarned. The question is, what do we do about it? If we do nothing, in two to four years, they will have a bomb. A military option is always available. It should be the option of last resort. I think there is a third way that should be done right now, and that is the application of voluntary sanctions on Iran. That is, this regime is very susceptible to economic pressures. It is a weak regime economically.

    CAVUTO: It has always had economic sanctions of some sort.

    NETANYAHU: Not really. Not the kind I'm talking about.

    CAVUTO: Give me a couple of examples.

    NETANYAHU: The most important thing is that they are dependent on their oil and gas industry that is 80 percent of their revenues. That is desperately in need of an infusion of new investment that is coming from a handful of European companies. Those companies are sucking in American investment. That is, a lot of your viewers do not know that their pension fund monies are going to European companies that are propping up the Iranian regime while...

    CAVUTO: So suck that money away.

    NETANYAHU: If you take that money away and you divest from the European regimes, companies that support Iran, you can bring the whole house of cards down.

    CAVUTO: Let me ask you, the prime minister has the worst poll ratings of any leader on the planet right now, even worse that President Bush, which I was startled to hear. Most, even within the party are urging him to step down. You right now lead almost all opinion polls, if an election were held right now, to be the next prime minister of Israel. Where do you stand on that?

    NETANYAHU: I think there is a widespread feeling in Israel that the government failed, especially in the conduct of the Second Lebanon War.

    CAVUTO: But he hangs on. How does he hang on?

    NETANYAHU: Well, you hang on because to have new elections, you need a majority of the Knesset, our parliament, to vote for new elections. And people do not automatically part with their seats, as you might know. So while the public would like the new government and new elections, the politicians are there.

    CAVUTO: What does your gut tell you about when elections would be then?

    NETANYAHU: As soon as I could have it, obviously. But not merely because I think I would get elected. There might be a parliamentary rearrangement that could change this government.

    CAVUTO: Yes.

    NETANYAHU: I think the right thing to do.

    CAVUTO: Well, because one of your successors, Ehud Barak, said he does not want you in there. And if it means forming a partnership, Labor leader, with a government right now, he would do it as a “stop Netanyahu.”

    NETANYAHU: Well, I think right thing to do is to let the public decide. That is what you do in democracies. And let me ask you, what do you do in a major corporation if you have a major failure? You change the leadership, right? What do you do in a military unit? You change the leadership. We just did in our army. We had the former chief of staff resign and a new one take over.

    CAVUTO: Why do you change when the economy is soaring? Like this is one thing I do not understand, Prime Minister. The economy is soaring in Israel. The market is soaring in Israel. You are a former finance minister — Firing on all cylinders. The leadership is very unpopular. I guess that is a lot like the U.S. But what is going on?

    NETANYAHU: Well, the reason that the economy is shooting off like a rocket is because in the last few years when I was finance minister and Mr. Sharon was the prime minister, he gave me the backing to make an economic revolution in Israel, a transformation that freed up the economy, freed it from government controls.

    So in many ways it is irrelevant how bad the government is doing because the economy is free to make use of the great initiatives and abilities of the Israeli people. You know, it is like, just imagine what we were like before we freed up the economy. Saudi Arabia has, I don't know, huge oil reserves, but it doesn't have an oil drill, OK? We have huge intellectual reserves.

    CAVUTO: But that very strong economy is what could keep Olmert in power.