President George W Bush and visiting German Chancellor Angela Merkel say they will continue to seek a diplomatic solution to Iran's nuclear programme.
Chancellor Merkel has been staying at Mr Bush's ranch
The comments came in a news conference at Mr Bush's Texas ranch, held during Mrs Merkel's two-day trip there.
Mrs Merkel said more sanctions might be required to force Iran to give up its nuclear aims - and Germany would study its business ties with the country.
Mrs Merkel has become one of President Bush's closest European allies.
Her visit follows that by French President Nicolas Sarkozy - and correspondents say Mr Bush is undertaking a charm offensive to woo the two influential European leaders.
Iran argues it is entitled under the terms of the nuclear Non-Proliferation Treaty to enrich uranium for peaceful purposes, and is ignoring a demand from the UN Security Council to stop.
Iran says its nuclear programme is purely peaceful
On Saturday, Mr Bush said the US would continue to pursue the diplomatic route to press Iran to change course.
"What the Iranian regime must understand is that we will continue to work together to solve this problem diplomatically, which means they will continue to be isolated," he told reporters at the ranch in Crawford.
"And what the Iranian people must understand is that we respect their heritage and respect their traditions, respect their potential - but it's their government that has made the decisions that are denying them a bright future."
Mrs Merkel warned that if Iran refused to freeze its nuclear work, then "we need to think about further possible sanctions".
The US, Russia, China, France, Britain and Germany have agreed to draft a UN resolution calling for new sanctions and officials are meeting in nine days to finalise a text unless the UN's nuclear watchdog reports concessions by Iran.
Mrs Merkel added that she would work with the business sector in Germany - one of Tehran's main trading partners - to reduce trade with Iran. Washington has been lobbying its allies to cut business links.
The BBC's Adam Brookes in Washington says although the two leaders appeared to be of one mind, one US source said talks between US and German officials in the lead-up to the visit had been messy.
For one thing the Germans appear reluctant to place tough unilateral sanctions on Iranian banks and other entities the way the US has just done, he says.
In remarks on Pakistan, Mr Bush said President Pervez Musharraf had taken "positive steps" to return to constitutional rule, and he expected that to happen "as quickly as possible".
But he said "eradicating al-Qaeda" remained a priority for both the US and Pakistan, and he remained confident that the Pakistani leadership was committed to the same aim.
"We share a common goal," Mr Bush said.
Ms Merkel said that the Middle East, Lebanon, the Doha trade talks, reform of the UN Security Council and climate change had also been on the agenda.
She said that the two had encountered some "differences of opinion" over steps to take on climate change.