The following is an unedited transcript of an interview with Secretary of State Condoleezza Rice by "Special Report" host Brit Hume, Tuesday, October 10, 2006:

"SPECIAL REPORT" HOST BRIT HUME: Madam Secretary, thank you very much for doing this.

SECRETARY OF STATE CONDOLEEZZA RICE: A pleasure to be with you.

HUME: On North Korea, is it now not possible to suggest that this was a false alarm, that this was not a nuclear bomb?

RICE: Well, we don't have full confirmation yet of what really happened there, and we probably won't for a little while. But the important thing is that said that they had in fact tested the nuclear weapon.

It is obvious that they are trying to make the point that they are a nuclear. It comes, of course, on the heels of a missile test, just a month, a month-and-a-half ago. And so we have to take it seriously.

And the condemnation that they have received in the international community is absolutely appropriate, and so will be the sanctions that they are going to receive from the Security Council.

HUME: North Korea is pretty isolated now. They kind of are a country under sanctions. How susceptible is North Korea to further sanctions, if the sanctions that have imposed already haven't done the trick?

RICE: Well, part of the goal is to make sure that it is really the countries that have leverage that are a part of the effort to pressure North Korea into coming back to the talks.

The United States has some leverage, but not nearly the leverage that China has, not nearly the leverage that South Korea has. Even with North Korea's isolation, it has extensive relations, economic and others, with China and with South Korea.

It has some with Russia and with Japan. And so having the right set of countries devoted to bringing pressure on North Korea is extremely important.

HUME: Talk a little bit about what kinds of things China could go along with that would make a difference, in your view.

RICE: Well, the Chinese are a principal funder of the North Koreans, and just in terms of foreign assistance, the kind of money that probably helps the regime to sustain itself.

Given the way the North Koreans sometimes use foreign assistance, I wouldn't even be surprised if it used to sustain the regime itself, and so the habits and the enjoyments that the regime might have. And so the Chinese, in cutting off assistance, can certainly make it more difficult on the regime.

HUME: Are you now convinced that the Chinese are prepared to do that?

RICE: Well, I think the Chinese are certainly willing to have sanctions of some kind. I think they recognize that this was a serious step over an important line, from their point of view. Their language is quite unlike anything that China has ever used about North Korea.

HUME: Oh?

RICE: And, yes, in fact, using language that they have used maybe only four or five times in decades, and really never about North Korea. They understand the danger of a North Korea that has missiles and nuclear weapons and can potentially one day marry those.

And so I think you will see the Chinese re-evaluated this. I don't know how far they will go, but the North Koreans have certainly put at risk their most important assistance from their most important partner.

HUME: The Japanese obviously have a lot at stake, and yet a leading Japanese official said, oh no, we had better talk about our going nuclear, which a lot of people think would be tremendously alarming to China, something they are trying to head off.

Does that — is that in effect taking an arrow out of your quiver?

RICE: No. I don't think there is anybody that really thinks changing the nuclear balance in northeast Asia by having Japan go nuclear would improve the security situation.

And look, we trust the Japanese. They are our security partner. But there is no evidence that this is a position that has any particular purchase in the Japanese system or certainly among the Japanese population.

HUME: But doesn't the possibility of it add pressure on the Chinese?

RICE: Look, the possibility that a North Korean nuclear weapon, that is, the nuclearization of the Korean Peninsula, could set off all kinds of effects in the region is certainly there, which is why I think you are seeing the Chinese react with the kind of strength and the kind of commitment that they are reacting with; because they don't want to see the nuclearization of the Korean Peninsula start to set off other security problems for them in the region.

HUME: The argument is made, and you have heard it many times, Democrats have been making it, others have been making it, that if the — there is nothing to be lost by engaging the north in bilateral talks that could be in addition to the six-party talks. That you don't have to capitulate to anything, you simply talk to them. What about that argument?

RICE: Well, one would have to ask why it is that the North Koreans are so insistent on bilateral talks. They have had plenty of chances to talk to us. In fact, they have talked to us bilaterally within the context of the six-party talks.

They have had a dinner with Chris Hill in the context of six-party talks in China. They are plenty of opportunities. So why are they pressing this? It is because they would like to be back in the situation that they were in in 1994, and in the '90s, where it was a bilateral issue between the United States and North Korea. So that when they cheated on the agreement that they had signed, it was cheating on the United States. It was not cheating on China. It was not cheating on Japan, not on South Korea.

What the North Koreans have sought to avoid is to be in a situation in which all of the interested parties with all of the leverage are all parties to the agreement. And when the North Koreans act badly, they get the kind of reaction that they got today from their most important partners, like China and like South Korea.

HUME: The suggestion that's been made, and I've heard it from Tony Snow today, the administrators seem to be saying that what the Clinton administration did in its bilateral relationship with North Korea was worth a try. In retrospect though, it failed. Was it not a mistake?

RICE: Well, any — I guess if it didn't work, it didn't work. And so you can go back and try to recreate, was it the right thing to do? I happen to think that trying to have a situation in which North Koreans would freeze and then dismantle their nuclear weapons is probably a good idea. The problem is, they froze, but they retained the possibility of unfreezing at any time. They then left the nonproliferation treaty.

By the way, we forget that they launched a missile test in 1998 over the sea of Japan at the whole time that this relationship was supposedly developing with the United States. So they never behaved very well during this time of intense bilateral contact. And I think the Clinton administration in fact had to send military force into the area to send a signal.

So the North Koreans, when they're in a situation that they can get the United States bilaterally, one-on-one, they're in a stronger position to violate an agreement and then say, well, it's the fault of the United States.

In a six-party framework, with all the important players at the table, they're just not in that position.

HUME: What about Kim Jong Il in North Korea — was it that you think they're trying to accomplish? What do they want?

RICE: Well, far be it from me to try to read the mind of Kim Jong Il and the North Koreans. I can tell you what they could have. They could have a situation, if they give up their nuclear weapons ambitions, in which there's an opening to the international system, in which they begin to have more normal relations with countries. Not to be sure, this is also a country that engages in illicit activities, like counterfeiting people's money. This is a country that abducts Japanese and South Korean citizens. So to talk about normal relations is a bit out into the future.

But they could certainly have an opening to the international system. And Brit, that would be so good for the people of North Korea who really are the long-suffering losers, being held hostage in this machine.

HUME: Do we have reason to believe that they traffic with terrorists?

RICE: Well, they certainly have had their activities with terrorism. I mean, having at one point actually blown up this cabinet of South Korean government. I don't know, but I think it's something we have to be concerned about. I think we have to be concerned that they would try to transfer dangerous technologies. It's why our efforts to intercept dangerous technologies, it's why the intelligence sharing is so important and it's important what the president said yesterday. That if they were to be involved in the transfer of these dangerous technologies to a non-state actor, they would have to pay full consequences for that.

HUME: Let's turn to Iraq for a moment. You were there last week, you delivered a message that appeared to be a stern warning. Similar warnings were heard from Senators Warner and Levin. What did you tell them and how was it received?

RICE: Well, I told the Iraqi government that it was the many members with whom I met, that it was time to put aside their political differences, it was time to get this national compact in place, that Prime Minister al-Maliki has talked about. That means a hydro-carbon law, that means a deal on de-Baathification. That means a deal to dismantle militia. The Iraqi people are expecting that to happen and they're impatient about it. It's time for the Iraqis to stop killing Iraqis. That that's something that's very hard for Americans to understand.

RICE: That's something that's very hard for Americans to understand. And it's time for them to build our security forces so that they can take responsibility for their own — their own security. I'll tell you, I said it was received very well, because I think they know that that's the task before them.

HUME: Other than the condemnation of their own people, what did you warn would be the consequences of failure to do these things?

RICE: Clearly, the president has been very clear that we are committed to Iraq, and we're committed to an Iraq that is able to govern itself and able to be at peace. The Iraqis need to understand, though, that of course, the other part of that is that they have to do what they need to do to be stable and to be at peace and to be secure. We can't do it for them.

I think they do understand that, and I found the reception of the message to be very good.

HUME: Has anything happened since then that indicates that they're acting on what you said?

RICE: Well, it's only been a few days, but I think you're going to start to see movement forward on their national compact, which gives everybody a clear view of where they will fit in the political bargain. So that's very important.

HUME: When you say it's time, that's another way of saying, as I think Senators Warren and Levin did, that time is short. How much time do you think they realize that they have to do this, or have the whole enterprise begin to be judged as a failure?

RICE: Well, I am not one for timetables, but I will tell you that they themselves believe that, over this next several months until the end of the year, they've got several elements of their national bargain, if you will, that they've got to get in place. They know that the levels of violence that Iraq is experiencing can't go on.

I have to say, you know, there are whole parts of this country that are secure and moving forward. But of course, there are parts of the country like Baghdad that are not secure. And they understand that they've got to get this political bargain in place. The security forces have to function. They've got to have police forces in which people actually have confidence.

HUME: Right.

RICE: And they don't have very long to do it. Their cue is that, by the end of the year, they really need to make progress on many of these fronts.

HUME: Iran. How do you see that now in terms of the movement forward by the international community and whether there's any realistic chance of getting the kind of urgency that you're now seeing on North Korea there?

RICE: Yes. Well, the urgency on North Korea is — is extraordinary. I think there's no doubt that I've rarely — maybe never — seen that kind of response from the international community.

On Iran, it has been a process of moving from Iran's insistence that it would not suspend its enrichment and reprocessing. And by the way, it has done so voluntarily, so it didn't have to.

HUME: Right.

RICE: To a mandatory requirement for suspension, to an effort to see if we could get, through negotiations, a suspension through talk, to now, I think, a recognition that the path that we're on is a Security Council path. There's work going on, on a resolution. It will be, I think, a good resolution under Chapter 7, Article 41, which means that it will have measures probably relating to trying to stop its nuclear program.

But it's going to take some time. I think you cannot underestimate, though, Brit, the collateral effects on Iran of being under a Chapter 7 resolution. Because if you're making decisions about investment in Iran, you're making decisions about how to deal with Iran financially, the fact that this is a state under Chapter 7 resolution is going to have an effect on your thinking about those.

HUME: For the benefit of people who may not know, what's the difference between Chapter 7 and other sanctions?

RICE: Well, Chapter 7 is the strongest article, the strongest chapter that you can use in Security Council, because it says that your behavior is a threat to international peace and security. It means that the world has put you on a black list, so to speak. And being on that black list is not some place that you want to be, if you want to have the kind of interaction with the world, the kind of investment that you need to flow, the kind of freedom to move financial assets. That's not a list you want to be on.

HUME: Madam Secretary, thank you very much.

RICE: Thank you very much.