The following is a transcribed excerpt from 'FOX News Sunday,' August 15, 2004:

CHRIS WALLACE, HOST: There was plenty of action on the foreign-policy front this week. U.S. and Iraqi troops battled insurgents in Najaf. There are new worries about Iran's role in the region. And the presidential campaigns argued over how best to defend the homeland.

Here to discuss all this, the chairman of the Senate Foreign Relations Committee, Republican Richard Lugar.

And, Senator, welcome. Good to have you with us here.

SEN. RICHARD LUGAR, R- IND.: Thank you, Chris.

WALLACE: For more than a week now, U.S. and Iraqi forces have been battling Shiite cleric Muqtada al-Sadr and his forces. How serious a threat do you think that these rebels and the possibility of a larger Shiite uprising pose to progress in Iraq?

LUGAR: Well, the progress situation really is in limbo. These are the players, the young Sadr that you've mentioned, who, after all, is a very minor cleric. But at the same time, the Ayatollah Sistani is in London. He is the senior cleric with whom our people had been dealing.  And he is out of the picture.

Other clerics...

WALLACE: He had heart surgery this week.

LUGAR: Yes. Other clerics are deferring to the young Sadr because they really don't want to get Shiites disunited.

So as a result, the Iraqi government, Prime Minister Allawi, his fledging government, is left with the very tough task of taking on Sadr and going, apparently, into the shrines, if that is their choice finally, and therefore alienating a good part of the 65 percent of the population, the Shiites, who will see this as desecration of the shrine, whether it's done by Americans or Iraqis.

It would be worse still if it were done by Americans, because Sadr's view is also that we ought to get out, that we are the occupiers, that essentially the fates of Iraq ought to be a theocratic government with Shiites in charge.

And so, he has said, "I'll be a martyr. I'm prepared to die for this principle. And he has enlisted, first of all, of course, his own forces back in Sadr City, a slum in Baghdad, where they have a good bit of control, and then has taken on the Najaf situation, the holy shrine city, where people have followed him because of his strength.

WALLACE: Let me ask you about it, because you make it sound when you say that the progress of the fledgling government is in limbo, you make it sound like it's a pretty serious...

LUGAR: Yes, it's very much at stake, because Sadr is also saying Allawi should resign, that these are puppets of the United States, this is not really an Iraqi government.

WALLACE: But let me ask you, last weekend Prime Minister Allawi said that there will be no truce, no negotiations with Sadr. There was fighting; then they tried to have talks. The talks have broken down.

How do they, how does the Iraqi government, how does the U.S., balance on the one hand the goal of crushing Sadr and his supporters and solving the problem, with on the other hand the danger of an explosion, if do you that?

LUGAR: Well, there is simply a big gamble involved in all of this.  Because the gamble is, if you don't crush Sadr, or at least get him totally disarmed and out of the picture so an example is set that Najaf is not one of many such places in which insurgents like the Fallujah situation might continue or in Somarra where American Marines were involved today in more action. If you don't stop this sort of thing, then the fledgling forces of the Iraqis, the police that are trying to be trained, are not going to make it.

Now, it's touch-and-go whether they are trained enough — that is, the Iraqi police — to take on Sadr now in Najaf. That will be a close contest if it comes to that.

But in any event, Allawi says correctly, if we don't meet it, we really don't have much of a government.

We have essentially Saddam wiped out and all sorts of locuses of authority, wherever someone has a militia, wherever somebody wants to gather together some people to take charge.

WALLACE: And all this, of course, happens as this national conference is starting...

LUGAR: Precisely.

WALLACE: ... to meet today in Baghdad...

LUGAR: The very day.

WALLACE: ... to form this assembly which would oversee the Iraqi government.

Let me switch, if I can, and talk to you...

LUGAR: Yes, and that assembly — a three-day assembly, a thousand people that are herded behind the security, essentially, of our compound.  They've got to reach a tough decision to get 100 people who will set the rules of the game for the election, but also have veto authority over Allawi by a two-thirds vote.

So this is not an inconsequential development, if there is to be an Iraqi democracy.

WALLACE: Let me ask you about Iran, because there is evidence that Iran is supporting some of these Shiite insurgents in Iraq, and also Iran is now saying it's going to go ahead with its program to enrich uranium, it says, to produce electric power.

How tough should the U.S. get with the ayatollahs running Iran?

LUGAR: Well, we're going to have to get very tough. We have been working closely — and we're hoping Europeans will get very tough, that the U.N. will get very tough, that the IAEA, the atomic energy people of the U.N., will get tough — in other words, that we're not out there all alone.

But the fact is that the Iranians are moving toward weaponization of the uranium experiment that they have. And they've been clearly doing this. And some, in fact, in Iran, are asserting, as a sovereign right, they have the ability to do this and the right to do it.

Furthermore, that they have a problem because Pakistan and India have nuclear weapons; they allege that Israel has nuclear weapons. So, in defense of their country, they're saying they can do it.

Now, the U.N., we are hopeful, will come forward with the Security Council to tell Iran to stop and then to impose sanctions, I suspect to begin with economic sanctions on Iran. And other nations hopefully are aboard — will observe that.

But not ruling out at the end of the day military sanctions against Iran. That is another step down the trail that is very serious.

WALLACE: Wait, when you talk about military sanctions, in the end, can the U.S. allow Iran to get the bomb? Or, in the end, if they proceed against the threat or the reality of sanctions, would the U.S. have to support a preemptive strike, such as Israel's against Iraq in 1981, to end their nuclear program?

LUGAR: I'm not going to speculate for a moment on a preemptive strike or any specific action. I'm just sort of tracing what I see to be the course to the U.N. We're not to the U.N...

WALLACE: What would military sanctions be, Senator?

LUGAR: Well, eventually the Security Council would say that the nations of the world, the people represented by the U.N., have got to do what is necessary to stop this.

WALLACE: But you're saying we cannot allow Iran to get a nuclear bomb?

LUGAR: No, I think that has to be stopped in the same way that over in North Korea we're working with the six-power talks, with the idea clearly at the end of the day is that North Korea gives up its program in return for whatever. And there is great discussion as to what "whatever" should be or whether we should be negotiating that at all.

WALLACE: Senator, I want to switch subjects with you, and I want to play a couple of clips from the campaign trail in recent days. Take a look.

(BEGIN VIDEO CLIPS)

SEN. JOHN KERRY, D-MASS., PRESIDENTIAL CANDIDATE: I believe I can fight a more effective, more thoughtful, more strategic, more proactive, more sensitive war on terror that reaches out to other nations.

DICK CHENEY, VICE PRESIDENT OF THE UNITED STATES: America has been in too many wars for any of our wishes, but not a one of them was won by being sensitive.

(END VIDEO CLIPS)

WALLACE: Senator, in the context in which Senator Kerry was speaking, "being sensitive to reach out to other countries," anything wrong with fighting a sensitive war on terror?

LUGAR: Well, we should reach out to other countries. And we're doing that in North Korea, obviously, with the six-power talks and with all of the talks that are involved in Iran — and, for that matter, with Iraq. We are eager for anyone to come in and to help us; encouraging people to do that.

So there's no difference really in the reaching-out process here. I think I would just say Senator Kerry is really moving against a false target. The reaching-out process is really profound.

WALLACE: But when he says, "I want to fight a thoughtful, effective, sensitive war on terror," is there anything wrong with sensitive? Because the Republicans have been making fun of him for saying that.

LUGAR: Well, I think the word "sensitive" has become a campaign issue itself. And you saw, as I did, the two clips that were brought at the fore. It is not an appropriate word, given, I suspect, the dangers that are involved.

Principally we've been talking about Iraq. There's nothing sensitive about the situation there for the moment. This is a tough business as to who is going to prevail and what kind of winds of political change could make possible a democracy in a tough situation.

WALLACE: Tomorrow the president is going to announce the first major reconfiguration of U.S. forces around the world since the end of the Cold War, pulling, we are told, up to 70,000 troops out of Europe and out of Asia.

First of all, do you think that's a good idea in general? And specifically, is it wise to pull troops out of South Korea at a time when there's considerable tension with North Korea?

LUGAR: Well, that's a tough call. And clearly, some have come out of South Korea already, as I understand, to go to Iraq simply to supplement there.

I think this is a situation for very careful, continuing negotiations with our South Korean friends and I would think with the six-power talks.  We ought not to do anything that's going to jeopardize the success potentially of those talks.

Now, I think the president's announcement is prospective. It will suggest that there is a great deal of negotiation and talks still to proceed, and there should be.

WALLACE: Just a little bit of time left, about a minute.

Porter Goss, named CIA director — to be nominated as CIA director this week by President Bush. Some people are concerned that, at a time when there was criticism of the CIA, that it didn't maybe tell it straight to the White House before 9/11, before the war in Iraq.

Is there a danger of having a politician as CIA director and particularly one who has taken sides, as a Republican congressman, in the presidential campaign?

LUGAR: I think that Porter Goss is a good selection. I think it's a timely selection, one that should be made. There could be many other candidates, but he seems to me to be clearly one at the top list of anybody's consideration.

I understand the real battle is with the 9/11 Commission and their desire to really change the configuration of intelligence, the nature of the leadership altogether. But I suspect that that will be subordinated for the moment to the need to have somebody there. And Porter Goss is a good person to be at the president's side. 

The real issue with Congress and the CIA is that CIA has not penetrated the al Qaeda cells. And we have not had the kind of intelligence that can only come if you're sitting around the table and you hear the dates and the place and so forth. Now, that is what the new director or the new configuration, whatever it may be, has got to achieve.

WALLACE: Senator, thank you. Always a pleasure to talk with you.  Come on back.

LUGAR: Thank you, Chris.