"After presenting what will probably be the final offer, if nothing happens we must be consistent, meaning the path of sanctions should be resumed more firmly than ever," his foreign minister, Franco Frattini, said in a television interview.
In a speech in western Iran, President Mahmoud Ahmadinejad said the Bush "era" had ended and promised Iran's foes would not be able to "harm even a centimetre" of its territory.
LAST EUROPE TRIP
Bush met Merkel at an isolated government residence north of Berlin where meetings can take place out of the media glare.
He then headed to Rome to meet Berlusconi and Pope Benedict before continuing on to Paris, London, and Northern Ireland.
Bush remains unpopular in western Europe more than five years after he clashed with Germany, France, Russia and others over the U.S.-led invasion of Iraq. A small protest greeting his arrival was expected on Wednesday in Rome.
"He (Bush) is trying to squeeze out additional Italian and European troops for Afghanistan and maybe Iraq and to get a green light for a possible terrible war against Iran," said one Rome protest leader, communist Marco Ferrando.
Bush told reporters in Meseberg he had no regrets about going to war in Iraq but admitted he could have been smarter in making the case for the U.S.-led invasion.
"I could have used better rhetoric to indicate that one, we tried to exhaust diplomacy in Iraq, and two, that I don't like war," Bush said. "But, no, the decision to remove Saddam Hussein was the right decision."
Bush said he expected to seal a security pact with the Baghdad government but called media reports that Washington is planning permanent bases in Iraq "erroneous". U.S. Democrats worry Bush could use agreements sealed before he leaves office to tie the next president into current Iraq war policies.
Merkel, a conservative who grew up in East Germany, has worked hard to repair ties between the Cold War allies and has forged a close relationship with Bush. But she acknowledged this week that a "new era" was looming when Bush is replaced.
Democratic candidate Barack Obama is especially popular in Germany, where he is likened to President John F. Kennedy, who won over the country in 1963 with his celebrated "Ich bin ein Berliner" speech.
Obama says he is ready to talk directly to Iran over its nuclear programme, a move the Bush administration has rejected.
