The leaders of Germany and France said on Saturday that Iran will face tougher sanctions if it does not rein in its nuclear programme.
Referring to an offer by US President Barack Obama to hold direct talks with Tehran on the nuclear issue, Chancellor Angela Merkel said Berlin hopes for a diplomatic solution to the dispute.
But she told a security conference in Munich that Germany is "also ready for tougher sanctions if there is no progress."
French President Sarkozy told the conference there was no alternative to tightening sanctions against Iran if it does not meet western demands.
He called on Russia to cooperate with other powers on such a move.
Mr Sarkozy also said an announcement by Iran that it has launched a satellite into orbit for the first time was "extremely bad news".
The UN Security Council has imposed three rounds of sanctions on Iran for refusing to suspend uranium enrichment.
Western powers suspect the work is aimed at building an atomic bomb. Tehran says it is for domestic power generation only.
Also at the conference, Vice-President Joe Biden promised a "new tone" in foreign policy under Presient Obama but warned that improved relations were a two-way street.
"America will do more, but America will ask for more from our partners," he said.