This is a partial transcript from "Hannity & Colmes," June 20, 2007, that has been edited for clarity.

SEAN HANNITY, CO-HOST: We get right to our top story tonight: The situation in the Middle East is critical. Israeli tanks crossed into Gaza today. Missiles were fired across the border. Four Palestinians were killed; two more were shot by Israeli army in the West Bank earlier today.

And every day sees tensions rise between Israel and their new Hamas- controlled neighbors in the south. Many observers believe that war is just a matter of time.

Joining us now live in our New York studio with the latest on this developing situation is former Israeli Prime Minister Benjamin Netanyahu.

Good to see you, Mr. Prime Minister. Thank you. First of all, let's explain to people what is happening here. And are we on the brink of a war?

BENJAMIN NETANYAHU, FMR. ISRAELI PRIME MINISTER: Well, what we've had happen here is that Israel unilaterally withdrew from Gaza. This was widely credited to Hamas' terror war. They won a political victory, then proceeded to win a military victory against the other Palestinians, kicked them out effectively, and made Gaza now a full Hamas-Iranian enclave.

HANNITY: Can I put some emphasis on this? We're going to do a segment on Sunday night on "Hannity's America." Hamas' charter was founded on the principle, written down, to destroy Israel.

NETANYAHU: Well, it not only was written. They say it every day.

HANNITY: They say it every day.

NETANYAHU: "Our goal is to destroy Israel" through what they call the armed conflict, which is terror. They're aligned with Iran. Israel withdrew unilaterally from Lebanon. That created the first Iranian enclave in our northern border with Hezbollah in Lebanon. Then Israel unilaterally withdrew from Gaza. It created the second Iranian enclave in the south with Hamas.

HANNITY: Hamas, right.

NETANYAHU: So now we're...

HANNITY: Surrounded?

NETANYAHU: ... surrounded, that's correct. But the parent country, Iran, is much more frightening than its proxies, because it is developing nuclear weapons with the explicit purpose of wiping us off the map...

HANNITY: Right.

NETANYAHU: ... and then proceeding to bigger and better targets, you.

HANNITY: Well, and I agree with you wholeheartedly here. Let me ask you a two-part question. I think this is very critical and the world needs to hear this. Iran is fighting war by proxy, funding Hezbollah, funding Hamas, funding the insurgency in Iraq, funding even the Taliban now we discovered in the last couple of weeks.

NETANYAHU: Right.

HANNITY: So they are the source of this terror. You have Jimmy Carter, an ex-president, who makes favorable comments about getting along with the terror group. What should the world do about Iran now, before they get nuclear weapons?

NETANYAHU: We have to stop Iran from having nuclear weapons.

HANNITY: How?

NETANYAHU: Well, first of all, we have to say that that is our goal and we have to be clear that it's not something we're going to live with. You don't let a messianic apocalyptic sect that views us as the small Satan that has to be removed in order to pave the way for attacks on the great Satan, and that's you.

HANNITY: That's U.S., yes.

NETANYAHU: You just do not let them have it. If they have nuclear weapons, they will run over the Middle East, take over the oil, and use the proliferation of nuclear arms there.

So that has to be stopped. Now the question is, how. There are two ways to stop it. One is the military option, and the other is the economic sanctions option. I think that the preference, obviously, is to first try the economic sanctions, but make it clear to everybody, including the Europeans, that if that fails, the military option will be entertained. That will get the Europeans to actually join in the economic sanctions.

HANNITY: How many more times does Ahmadinejad get to say publicly the Holocaust didn't exist and we want to wipe Israel off the face of the Earth, where even the economic sanctions you're talking about are no longer a viable option? That it must be military, that somebody can only threaten you so many times before you believe them?

NETANYAHU: Well, I think the economic options are still viable, because the Iranian economy is very weak. And I think Ahmadinejad could actually be brought down by powerful economic sanctions.

HANNITY: Economic sanctions.

ALAN COLMES, CO-HOST: Mr. Prime Minister...

NETANYAHU: But they have to be joined. And I'm here in New York because I talked today to the controller of the New York State pension funds, Mr. DiNapoli. And I asked him to do what was done before that in Missouri, and most recently in Florida, and very soon in California. That is get a divestment of U.S. pension funds, make sure that that money does not go to European firms that do business with Iran.

COLMES: Isn't that better than a military option?

NETANYAHU: I'm sorry?

COLMES: Isn't that much better than a military option?

NETANYAHU: I would prefer to use economic sanctions and leave a military option as the option of last resort.

COLMES: Is military inevitable?

NETANYAHU: It should not be taken off the table, because we have to do whatever it takes to make sure this latter-day crazy regime, Hitler-like regime, does not get nuclear weapons.

COLMES: Let's say you're a country, and you keep hearing other countries say, "You're evil, we've got to put military on the table, we've got to take you out before you take us out." Wouldn't you, as that country, do something to prepare yourself for the possibility that that country, thinking ill of you will come after you? Isn't that what Iran potentially is doing when this overheated war rhetoric toward them continues?

NETANYAHU: No, they began before the rhetoric, and they are talking about annihilating Israel. Nobody is talking about annihilating Iran or wiping the Iranian people off the face of the Earth. So these people are actually governed now by an apocalyptic crazy sect that wants to take over the oil in the world, that wants to topple regimes, that wants to launch terrorism far and wide.

COLMES: If you had your way, and you were prime minister, and you had the ability to move, as the prime mover of Israel, what would do you? Would you go after Iran right now? Would you go take out some of their weapons, as you did in Iraq?

NETANYAHU: I would come to the president of the United States, and I would say, "It's your interest and your responsibility to make sure that this crazy power that hates America with a passion, and views us merely as your extension. That this crazy power does not become the first undeterrable nuclear regime in the world."

COLMES: Would you urge the United States, if you were in that position, to take military action against Iran?

NETANYAHU: I would certainly tell them that they should entertain all measures. And I would urge the United States to stiffen up the first measures that I talked about, that is the economic measures. But I would make it clear that whatever it takes, Iran will not acquire nuclear weapons because, at that point, our common situation will be horrendous.

COLMES: You've got the IAEA saying they're years away from nuclear power, that what they have now...

HANNITY: Three to eight.

COLMES: ... is simply usable for energy, that it's not usable for military use. That's what the IAEA is saying. We're hearing the same rhetoric about Iran in this country that we heard about Iraq and that didn't work out very well. I don't know how we could start talking about military action at a time like this. And doesn't that encourage Iran to arm itself militarily, if we're making these kinds of noises?

NETANYAHU: No, I think if Iran knew — two things. One, we're not speculating about Iran's nuclear program. There was speculation, just that, about Iraq's non-conventional weapons. And as it turned out, they were wrong.

But in this case, we have the president of Iran giving us guided tours to his centrifuge halls. He shows the centrifuges. He's saying we're just, you know, a few steps away from having fissionable material, which is meant to create a bomb, not to heat up Iran's furnaces, right?

So we have no question that Iran is racing to develop nuclear weapons. Our best assessment — and I think it's a common assessment now — is between two to four years. That doesn't take very long. It's about 1,000 days, and this day is just gone.

So I think we have to recognize the danger is real. Secondly, we have to recognize that, if Iran knows that there is absolute determination on the international scene, led by the United States, to prevent it from making a bomb or an arsenal of bombs, then it would more likely desist than try to push to ram its head against the wall.

HANNITY: I hope the world wakes up. This is a very dangerous situation. Good to see you, Mr. Prime Minister.

NETANYAHU: Good to see you again. And I hope one day we'll have another topic of conversation, because this danger will be removed not because Iran will have it.

HANNITY: I agree with you.

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