Bush said Iran funds terrorist extremists, undermines stability in Lebanon, sends arms to the hardline Taliban regime, intimidates its neighbors with alarming rhetoric and defies the United Nations by refusing to be open about its nuclear program.

"Iran is the world's leading state sponsor of terror," Bush said in a speech about democracy that he delivered about midway through his eight-day Mideast trip, which began with a renewed push for an Israeli-Palestinian peace pact — an accord he said whose "time has come."

Chiding U.S. allies who have withheld civil liberties, Bush said governments will never build trust by harassing or imprisoning candidates and protesters. But his rebuke was general, and he did not single out any U.S. partner in the region for oppressive practices.

"You cannot expect people to believe in the promise of a better future when they are jailed for peacefully petitioning their government," Bush said. "And you cannot stand up a modern, confident nation when you do not allow people to voice their legitimate criticisms."

Bush's speech, reprising the call for democracy in the Middle East that he made in his second inaugural address, was delivered in one of the few countries in the region — the Emirates — where democracy has not been a vital issue. In other countries in the region, especially Egypt, the fight between democracy activists and autocratic governments has been much more pointed and controversial.

The president lauded some democratic reforms among Arab nations. He urged the Arab leaders to show support for the fragile Iraqi government, open their societies and provide backing, and possible funding, to help make an Israeli-Palestinian agreement stick.

"Leaders on both sides still have many tough decisions ahead, and they will need to back these decisions with real commitments," Bush said, "but the time has come for a holy land where Palestinians and Israelis live together in peace."

He called on the Palestinians to reject extremists, although he did not specifically mention the Islamic radical group Hamas, which has gained control of the Gaza Strip.

"The dignity and sovereignty that is your right is within your reach," Bush said in a direct appeal to the Palestinians.

On Iran, Bush is privately trying to allay the concerns of Persian Gulf allies nervous about Iran's military might and spreading influence. Gulf allies are jittery after the Jan. 6 confrontation between U.S. and Iranian naval vessels off their shores, but seek assurance that Bush doesn't want war. Any attack on Iran could bring retaliation against military bases on Arab soil or choke the lucrative oil trade through the Strait of Hormuz.

"Iran's actions threaten the security of nations everywhere," Bush said, calling on the Iranian government to make itself more accountable to its citizens. "So the United States is strengthening our long-standing security commitments with our friends in the Gulf, and rallying friends around the world to confront this danger before it is too late."

Earlier Sunday in Bahrain, U.S. Vice Adm. Kevin Cosgriff, commander of the U.S. Navy's 5th Fleet, which patrols the Gulf, told Bush that he took it "deadly seriously" when an Iranian fleet of high-speed boats charged at and threatened to blow up a three-ship U.S. Navy convoy passing near Iranian waters. The Iranian naval forces vanished as the American ship commanders were preparing to open fire.

Bush spoke with Cosgriff after he had a breakfast of pancakes and bacon with troops of the U.S. 5th Fleet based in Bahrain.

"The media may be free to second-guess the military decision, but his (Bush's) captains are not and they take it very seriously," White House press secretary Perino told reporters aboard Air Force One en route to the United Arab Emirates. "They have deliberate and measured ways to engage other traffic there in the Strait of Hormuz, which they did. But all the military people remember what happened in the past, such as the USS. Cole ... The vice admiral said they take it deadly seriously."

Seventeen sailors were killed in a terrorist attack on the USS Cole in Yemen in October 2000.

Bush spoke at the Emirates Palace, at an opulent, gold-trimmed hotel where a suite goes for $2,450 a night. Built at a cost of $3 billion, the hotel is a kilometer long from end to end and has a 1.3 kilometer white sand beach — every grain of it imported from Algeria, according to Steven Pike, a spokesman at the U.S. Embassy here.

Half the audience was dressed in western attire and the other half in Arabic clothes — white robes and headdresses for men and black abayas, many with jeweled edges, for women.

In renewing his "Freedom Agenda" — Bush's grand ambition to seed democracy around the globe — the president declared: "We know from experience that democracy is the only system of government that yields lasting peace and stability."

Yet he was speaking about democracy in a deeply undemocratic country, the Emirates, where an elite of royal rulers makes virtually all the decisions. Large numbers of foreign resident workers have few legal or human rights, including no right to citizenship and no right to protest working conditions.

Some human rights groups have accused the Emirates of tolerating virtual indentured servitude, where workers from poor countries like Sri Lanka are forced to work to pay off debts to employers, and have their passports seized so they can't leave.

Shortly after landing during a steady rain on the southeastern tip of the Arabian Peninsula, Bush met at a ceremonial palace with Sheik Khalifa bin Zayed al-Nahyan, who was appointed president of the United Arab Emirates in 2004 following the death of his father, Sheik Zayed bin Sultan al-Nahyan. The UAE president presented Bush with a ceremonial sash that looked like a thick golden necklace about two feet long. A portrait of the late president hung on the wall behind them.