"I find it surprising that the Arab countries are not engaged in dialogue between Iran and the West. The neighbours so far have been sitting on the fence. Any solution to the Iranian issue has to engage the neighbours," ElBaradei told a foreign policy forum in the Austrian parliament late Monday.
The West suspects Iran of trying to build a nuclear bomb under guise of a peaceful atomic energy programme, a charge Tehran rejects.
But even after six years of intensive investigations, the Vienna-based International Atomic Energy Agency has not been able to ascertain whether the Islamic republic's nuclear activities are entirely peaceful as Iran claims.
ElBaradei called on Iran to be more transparent about its atomic programme.
But fears Tehran could one day use its technology to build a bomb were not a technical but a political issue, the Egyptian-born diplomat said.
Therefore, a security structure in the Middle East should be found that also involved Israel, which is widely believed to have nuclear weapons, said ElBaradei, who is set to step down as IAEA chief in November after 12 years at the helm.
"Iran could be a positive force in the region; it could also be a source of conflict and confrontation," he said.
The 66-year-old Nobel Peace Prize laureate expressed hope that the new US administration will make progress in resolving the standoff with Iran.
Unlike his predecessor, George W. Bush, President Barack Obama has suggested direct diplomacy with Iran.
ElBaradei said the "Number One security threat" facing the world was the possibility that extremist groups could gain possession of nuclear weapons or materials.
The IAEA therefore needed more funding to step up its work in nuclear security, he argued.
"Deterrence does not work in the case of extremist groups … because if they were to acquire a nuclear weapon or powerful radioactive source, they would simply use it," ElBaradei said.
