"All options, including the military one, are on the table," Rumsfeld said in an interview with Monday's edition of German financial newspaper Handelsblatt.
"Today, biological, chemical and radiological weapons are available which could kill tens of thousands of people," Rumsfeld said, in comments in German.
Iranian nuclear crisis escalated on Saturday when the UN's International Atomic Energy Agency voted to report the Islamic republic to the UN Security Council over its atomic programme.
Iran said on Monday that large-scale uranium enrichment work, which is the the focus of fears that it is seeking nuclear weapons, would begin in "due course" in response to the IAEA decision.
Rumsfeld said: "There is a genuine possibility that these weapons could fall into the hands of people who behead innocent people and blow up children.
Iranians face possible sanctions
because of the nuclear crisis
"The people of the free world must realise that they have been warned."
He said Iran must be prevented from developing a nuclear weapon. "We know that terrorists are desperately seeking ever more deadly weapons.
"Iran is the main sponsor of terrorist organisations such as Hizb Allah and Hamas," he told Handelsblatt.
Also on Monday, Philippe Douste-Blazy, the French foreign minister, said Iran faces "very serious" consequences as a result of its refusal to curb its nuclear activities".
He said on French radio: "If they isolate themselves, it will be very serious for them."