Israel and militant Palestinians are locked in deadly battle in the Middle East, but Iran poses the biggest challenge in the region to the incoming Obama administration, President Bush's national security adviser says.

At the same time, the Mideast offers President-elect Barack Obama the greatest opportunity to put his imprint on world affairs, Stephen Hadley said, referring to the need for a lasting Israeli-Palestinian peace accord that eluded both Bush and former President Bill Clinton.

Outside the Mideast, it is Pakistan that should command Obama's keen attention, said Hadley, who has been senior foreign policy adviser to the president for eight years.

Hadley, who is always in the shadows and rarely seen by the public, discussed Bush's two terms and the international challenges -- ones he says will not pause for America's transfer of power in January -- during a nearly hourlong interview Tuesday with The Associated Press in his West Wing office. He was also delivering a speech Wednesday at the Center for Strategic and International Studies.

He said the Taliban remains a serious threat in Afghanistan, where the U.S. is getting ready to dispatch at least 20,000 extra troops.

"Its fighters have found safe haven across the border in Pakistan, and if the extremists succeed in destabilizing Pakistan, the chaos will threaten peace and progress throughout the region," he says in remarks prepared for Wednesday. "Stabilizing Pakistan must be the first priority for the new administration."

Hadley said the U.S. needs to continue to provide equipment, training and greater intelligence to Pakistani security forces so they can better police the mountainous border, where insurgents cross into Afghanistan.

Asked in the AP interview about potential terrorist ties among Pakistan's military-controlled spy agency, the Inter-Services Intelligence, Hadley would only say it is "an issue that has been raised with the government of Pakistan." He did, however, note recent personnel changes within the ISI, which he said is the kind of thing Pakistani officials might do to make sure the ISI is following government policy against supporting terrorists.

On Iran, Hadley said more leverage -- in the forms of sanctions -- is needed to force Tehran to give up its nuclear ambitions and support of extremists. He said the Bush administration has been trying to "shore up and store up leverage" to bequeath to the Obama administration. Obama's challenge, he said, will be to use those sanctions to pressure Iran to change its behavior.

Last month, Obama suggested that a combination of economic incentives and tighter sanctions might work. Tehran rejected the proposal. Obama also has said he would pursue tough-minded diplomacy.

Hadley would not comment about whether the incoming administration should strike up a dialogue with Iran. But, he said, the U.S. "would be foolish to talk without leverage, because talking and negotiating without leverage won't get you a deal that will advance your interests."

He had stern words for Hamas, underscoring the need to stop the Islamic militant group from smuggling weapons into Gaza and firing them into Israel. Israel has retaliated with air strikes and a ground assault, killing hundreds in the tiny, coastal Palestinian territory and causing outrage in the Arab world.

The only way Hamas will stop firing rockets is if it knows it will pay a heavy price, Hadley said.

"That's the kind of deterrence that Israel is trying to establish," he said. "But it also means it has to be a situation where Hamas will pay a political price, in terms of its standing in the Arab world and with its own people, if it once again starts launching missiles and therefore, once again, provokes the kind of retaliation" from Israel.

Asked whether Egypt had done enough to stop the smuggling of weapons across its border, Hadley wouldn't point fingers.

"Preventing them is very hard because Hamas clearly wants them and countries like Iran and Syria clearly want to supply them," he said, adding that more work needs to be done to interdict the weapons between supplying nations and the tunnels that lead into Gaza.

Hadley urged the new administration to build on the work the Bush administration has done toward forging a peace agreement between Israel and the Palestinians.

"I hope the new team will not feel compelled to reinvent the wheel," he says in the speech.

Looking back on his years at the White House, Hadley said false intelligence about Saddam Hussein's weapons of mass destruction, which were never found, was a "huge setback" in terms of the public understanding and support for the war in Iraq.