Merkel told the Munich Conference on Security Policy that Iran had "overstepped the mark" with its nuclear program, while Rumsfeld said the world "does not want a nuclear Iran."

"We want to prevent and we must prevent Iran from developing nuclear weapons," Merkel said in her speech. "The concerns and fears over Iran's nuclear program are legitimate."

The UN's nuclear watchdog, the International Atomic Energy Agency (IAEA), voted on Saturday to report Iran to the UN Security Council, paving the way to possible sanctions over its atomic program.

Iran retaliated by saying it would begin full-scale uranium enrichment and limit inspections by IAEA officials.

Merkel said Iran still had a chance to avoid the sanctions by accepting a Russian proposal to allow Iranian uranium enrichment to take place in Russia, which would prevent Tehran from mastering sensitive nuclear technology.

She called on Iran to consider the compromise as a "window of opportunity."

Merkel alludes to Nazi rise in speech on Iran

The German leader had strong words for Iranian President Mahmoud Ahmadinejad, who has called for Israel to be "wiped off the map" and has branded the Holocaust a "myth."

"A president who denies the existence of Israel and the Holocaust cannot expect to receive any tolerance from Germany," Merkel said.

She compared Ahmadinejad's statements to when Adolf Hitler came to power and began threatening to exterminate European Jews. "Remember that in 1933 many people said it was just rhetoric," Merkel said.

The international community "must fight these beginnings now," she said.

Rumsfeld tell conference Iran is a global threat

Rumsfeld told the 300 high-level delegates at the conference that Iran was a genuine threat to global peace. "The Iranian regime is today the world's leading state sponsor of terrorism," he said.

"The world does not want, and must work together to prevent, a nuclear Iran," he added, urging the global powers to unite and find a diplomatic solution to halt Iran's nuclear program.

In Tehran, Rumsfeld's Iranian counterpart Mostafa Mohammad Najjar said in response that the leaders of the United States were "terrorists" who represented the "real axis of evil."

Iran insists it is developing a peaceful atomic energy program, but the Western world suspects it is planning to build nuclear weapons.

Responding to Merkel's speech and speaking before the IAEA decision, Iran's deputy foreign minister for legal and international affairs, Abbas Araghchi, said that referral to the Security Council would not lead the Islamic republic to halt its nuclear activities.

Araghchi blames Europe for failure of diplomacy

"If the case is sent or even reported to the UN Security Council, based on the law of our parliament, our government has no way of stopping nuclear activities," Araghchi said during Merkel's question and answer session.

He blamed the three EU nations -- Britain, France and Germany -- which have negotiated with Tehran over its nuclear ambitions, for creating the conflict.

"We did whatever we could. But as you know after three years of negotiations we left empty-handed," Araghchi said.

Merkel brushed off his statement, saying that Iran "should consider amending its laws" and adding that she would have liked to hear him comment on his president's denial of Israel's existence. "That was missing," Merkel said.

The three-day Munich conference concludes on Sunday when Russia's influential Defense Minister Sergei Ivanov will be the main speaker.

More than 1,700 people demonstrated in central Munich against the conference, police said.

The protest, organized by left-wing and pacifist groups, featured placards demanding: "We want disarmament, not job losses" and "Stop the warmongers."