"We believe the diplomatic track can work but it has to work both with a set of incentives and a set of teeth," Rice told reporters travelling with her to Israel and the Palestinian Territories.
The United States has been critical of a deal Mohamed ElBaradei, the head of the UN atomic energy watchdog, has made with Iran to answer long-standing questions about its nuclear activities.
Rice, who has previously accused ElBaradei of "muddying the message" to Iran, voiced strong irritation with the IAEA chief.
"The IAEA is not in the business of diplomacy. The IAEA is a technical agency that has a board of governors of which the United States is a member."
Washington and its European allies argue that IAEA moves divert attention away from UN Security Council demands that Iran suspend uranium enrichment and grant broader inspections.
"It is not up to anybody to diminish or to begin to cut back on the obligations that the Iranians have been ordered to take," Rice said.
The UN Security Council has passed two sanctions
resolutions against Iran. The United States is pushing for a third, harsher round of measures, which China and Russia oppose, arguing that the IAEA should be given more time before either further sanctions or military action are considered.
"The IAEA is not in the business of diplomacy. The IAEA is a technical agency that has a board of governors of which the United States is a member"
Condoleezza Rice, the US secretary of state
ElBaradei has urged Western powers to be patient and has been critical of talk of future military action by the United States and others against Tehran, telling nations opposed to his efforts to learn from the US-led invasion of Iraq in 2003.
Bernard Kouchner, France's foreign minister, raised the spectre of war with Iran this week but has since played down his comments, saying they were meant as a warning against military action and not to incite it.
Rice declined to comment on Kouchner's statements but said: "The key here is that we are committed to a diplomatic track but the president has not taken any of his options off the table."
Aside from UN action, the United States and its European allies are considering a range of unilateral measures against Iran. US officials say Washington may soon sanction a unit of Iran's Revolutionary Guard Corps, among other punitive steps.
Political directors from the major powers are to meet in Washington on Friday to discuss what could be included in a third UN resolution, said Rice, without elaborating.
Tehran says its nuclear programme is for civilian power generation while Washington and others say it is geared towards building a bomb. Western powers point to Iran's past secrecy over nuclear research as cause for concern.