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When Barack Obama takes office in January, he will be greeted by many difficult challenges, beginning with the acute economic crisis. But he will not have the luxury of focusing on this exclusively. He will also have to contend with an array of foreign policy challenges. Of these, Iran and its nuclear program may well constitute the Obama administration's first foreign policy crisis.

The reason is simple. Iran is well down the path to being able to enrich uranium on a large enough scale to produce a nuclear weapon. The International Atomic Energy Agency just reported that Iran may well reach this point in 2009.

An Iran with a nuclear weapon or the ability to produce one or more bombs in short order poses a true danger. Still, one path for the new American administration would be to adopt the "North Korea option" and live with the threat. The risk is that doing so would make an already unstable Middle East even more so.

In a crisis, Israel or Iran could be tempted to use nuclear weapons out of fear that the other would. There is also the chance that countries such as Egypt or Saudi Arabia would develop or acquire nuclear weapons of their own. The United States could take steps to reduce these risks, including providing missile defence and security guarantees to selective countries, but it is far from clear that such efforts would succeed.

Moreover, further nuclear proliferation is not the only danger if Iran proceeds with its nuclear efforts. What Tehran does directly and through such groups as Hezbollah and Hamas has and will continue to have a major and mostly adverse impact on the future of Iraq, Afghanistan, Lebanon and Palestine. Iran is already one of the Middle East's most powerful countries. A nuclear Iran is likely to act more aggressively in the belief that its nuclear capability afforded it considerable protection.

A second policy option would be for the United States, Israel or both to attack Iran's known nuclear installations. Such a pre-emptive attack would certainly destroy some or even most of Iran's existing nuclear facilities and materials. But some capability probably would survive, and the nuclear program could be rebuilt over several years in a manner that would make a second attack much more difficult.

There would also be serious consequences long before then. It is highly unlikely that Iran would simply absorb a U.S. or Israeli military strike. Instead, it could be expected to retaliate by attacking U.S. forces in Afghanistan and Iraq, unleashing terrorist attacks throughout the region and the world, and interrupting the flow of tanker traffic through the Strait of Hormuz. The last thing the world economy needs is a $200 barrel of oil, but this could be the result.

What's certain is that both options - living with a nuclear Iran or attacking it - involve serious risks and costs. The best outcome would be one in which Iran was persuaded to freeze or suspend its nuclear efforts or, better yet, give up an independent capability to enrich uranium. It is conceivable that Iran could be allowed a symbolic "right" to enrich, but any such program would have to be extremely small so as not to pose a threat. It would also need to be subject to highly intrusive inspections, so the world could be confident that Iran was not secretly enriching uranium and developing nuclear weapons.

What would it take to essentially eliminate Iran's uranium enrichment effort?

To begin with, it would entail putting together a diplomatic package that offered Iran access to nuclear energy but not physical control over nuclear materials. Economic sanctions could be eased. Security assurances could be provided and normal diplomatic relations between Tehran and Washington could be established.

There is no guarantee that Iran would accept such an offer. But it might, especially now that the price of oil has fallen below $50 a barrel, a level that leaves the Iranian economy in worse shape than ever.

What would also help would be to make clear that Iran would face additional sanctions, including constraints on its ability to import refined petroleum, if it refused to accept a fair and reasonable compromise. Persuading Russia and China to support a package of requirements, incentives and penalties would be important. In addition, the odds Iran would accept such an offer might increase if the details were made public. The Iranian people may well choose leaders in next June's election who can deliver a much higher standard of living over those who would run the country into the ground.

But it is possible that Iran will reject any diplomatic compromise, even one put forward directly by the Americans. Mr. Obama and the world would then have to choose between tolerating an Iran with nuclear weapons (or the ability to produce them quickly) and using military force to prevent this outcome. It is the worst sort of choice, as neither option is attractive. For that reason, it is all the more important that diplomacy be recast and given one last chance.

Richard Haass is president of the Council on Foreign Relations and a former director of policy planning at the U.S. State Department.