"If Beijing does not engage with the Dalai Lama now, it will only serve to strengthen those who advocate extreme views," he said of China's angry tirade since protests erupted across Tibet in March.
"Public vilification of the Dalai Lama will not help defuse the situation."
Negroponte said China would not achieve stability in the Himalayan region under its rule unless it resolves long-standing grievances and is able to work with the Buddhist leader.
'Outreach and dialogue'
"Through outreach and genuine dialogue, China and the Dalai Lama, the spiritual leader of the vast majority of Tibetans, can begin to bridge differences, explore the meaning of genuine autonomy and address long-standing grievances," he said.
Beijing has accused the Dalai Lama of inciting the March 14 riots in the Tibetan capital, Lhasa, and the ensuing unrest in other ethnic Tibetan areas, saying it was part of a bid for Tibetan independence and to ruin the upcoming Olympic Games.
The Dalai Lama has denied that he orchestrated the unrest, and said he wants autonomy for Tibet and not an independent state.
The US has been trying to persuade China to talk to the Dalai Lama and for diplomats and other observers to be allowed into Tibet.
The lack of access has been a cause for concern because China has reportedly detained some 4,000 people and "reports of mistreatment of detainees are numerous", Negroponte told the Senate Foreign Relations Committee.
Noting China's "minimal" response to the suggestions, he said it was a US priority to establish a permanent diplomatic presence in Lhasa.
Negroponte said while the US was against any boycott of the Beijing Olympics it was deeply troubled by reports of bloodshed and arrests Tibet.
He acknowledged that the widespread calls for a boycott reflected real concerns with China's human rights record.
George Bush, the US president, has said he will use his presence at the games in August to raise human rights issues directly with Chinese leaders.
Senior US legislators have urged Bush to skip the ceremonies.
Gordon Brown, the British prime minister, and Angela Merkel, the German Chancellor, have both said they will not attend the Olympic opening ceremonies.