While agreeing with the assessment that the military strike would only push back Iran's nuclear weapons quest by three years at the most, Panetta said, "the strike could have a serious impact on the region and it could have a serious impact on US forces in the region."
"You've got to be careful of unintended consequences here," the Pentagon chief said as he reiterated that US was in talks with its partners and allies in regard to imposing newer sanctions on Tehran.
Panetta, a former CIA chief, said the IAEA report was in line with intelligence assessment that suggest Tehran is trying to develop nuclear capabilities, but there is a division within the country whether to build a bomb.
Asked what would be Washington's response if sanctions don't work, the defence secretary said: "I hope we don't reach that point and that Iran decides that it should join the international family."
The Pentagon chief, however, said that US agrees that military action ought to be the last resort.
"I think all of those things, you know, need to be carefully considered. Look, Israel and the United States share a very common concern with regards to Iran. And that concern was reflected in the IAEA report that was issued this week," Panetta told reporters at the press conference which was also attended by the Chairman of Joint Chiefs of Staff General Martin Dempsey.
"For that reason, it is important for us to make sure we apply the toughest sanctions economic, diplomatic pressures on Iran to change their behavior. We are in discussions with our allies with regards to additional sanctions that ought to be placed on Iran," Panetta said.
He said the US has made very clear that it's unacceptable for Iran to develop a nuclear capability.
"We've made that point time and time again. We have taken steps and implemented sanctions to make that clear to Iran," he said.
"Iran is a signatory to the Non-Proliferation Treaty. They've got to abide by that. They've got to abide by international standards. They've got to abide by international rules. And, obviously, the report from the IAEA just indicates that that is not the case," he said.
"The fact that a respected international organization like IAEA has come to this determination I think raises serious concerns that Iran continues to flaunt international rules and standards, and as a result of that, it's very clear that additional sanctions have to be applied," Panetta said.
"For that reason, it is important that the world come together to apply sanctions against Iran and make very clear to them that they are going to pay a heavy price if they continue along this track. As to what happens down the road I think our hope is that we don't reach that point and that Iran decides that it should join the international family," he said.