Being the ambassador from Israel has never been a good way to make friends at the United Nations. But Dan Gillerman says that over the past five years he has forged ties with diplomats from several countries that officially scorn his own. In that time he has also had to manage the fallout from the invasion of Iraq, the 2006 Lebanon war and the growing Iranian nuclear program. With his term coming to an end, he spoke with NEWSWEEK's Lally Weymouth about Iran, the peace process and last week's prisoner exchange between Israel and Hizbullah. Excerpts:

WEYMOUTH : What do you think about negotiating with a terrorist organization like Hizbullah?
GILLERMAN: Israel has never dealt directly with Hizbullah. We were dealing through mediators, through the Germans, but never directly with Hizbullah.

Do you approve of the exchange?
I think it has problems because it signals to the other side that Israel is willing to pay a price even for dead soldiers, which may make the other side feel that they can be irresponsible in dealing with our prisoners. On the other hand, it shows Israel's commitment to soldiers.

Why can't Israel get Gilad Shalit [another kidnapped soldier] out of Gaza?
The price they are asking for Gilad Shalit is very high … the release of about 450 prisoners. Many of them are murderers with blood on their hands.

Is Israel going to do something to prevent Iran from becoming a nuclear power?
I think Israel should do everything in its power, literally everything, to prevent that mad regime in Tehran … from achieving nuclear weapons. I believe it is Israel's responsibility to its people, but I believe also it is the responsibility of the international community. Iran is a threat not just to Israel but to world peace and security. It is up to the international community to act rather than to expect Israel to act.

Knowing that the United States is going to change administrations, would you want to see Israel do something about Iran's nuclear program now?
As Israel's ambassador to the United Nations, I believe that all diplomatic efforts have not yet been exhausted. There were three sanctions resolutions adopted by the Security Council. We know the Iranian leadership and the Iranian people were not indifferent to these resolutions. They were quite rattled, not just by the sanctions, but mainly by the unanimity. I don't think Iran wants to be a pariah state.

Do you think that Saudi Arabia is building a nuclear program?
I have no doubt that if Iran is allowed to develop its nuclear program, many other countries in the region—including Saudi Arabia and Egypt—will follow suit. Saudi Arabia is probably more threatened by Iran than Israel is. Iran has designs on Saudi Arabian oil.

You met Benazir Bhutto last year. What was your impression of her?
She was a very charming, charismatic lady. She told us that when she was prime minister, the heads of Pakistan's atomic-energy agency came to her and said, "Pakistan is in deep economic trouble. We can make a lot of money by providing know-how and selling our nuclear capability." She said, "You are crazy, I will never allow it. The only three countries who would be willing to buy it from us are Iran, Libya and Syria, and I forbid you to do it."

Will there be an Israeli-Palestinian agreement covering the future of Jerusalem by the time President Bush leaves office?
There is a real possibility that some kind of agreement will be reached before the end of this year. We have never had so many different parties so eager for it to happen. There is the Bush administration, eager for some kind of achievement. We have [Israeli Prime Minister Ehud] Olmert, who is eager for a breakthrough. We have [Palestinian President Mahmoud] Abbas, who needs it to survive. And we have something which I am not sure we had before, and that is a real will on the part of the moderate Arab and Muslim world for it to happen. When I returned from Annapolis, I was cautiously optimistic. What brought the moderate Arabs to Annapolis was fear.

Fear of Iran?
Fear of Iran. I believe that fear of Iran is actually making them willing to be much more pragmatic and realistic about solving the Israeli-Palestinian conflict. They know that the Israeli-Palestinian conflict is not the core problem, but they know that if they do solve it, they will calm the streets and be able to align themselves against the real danger, which is Iran.

Israeli Defense Minister Ehud Barak recently said that U.N. Resolution 1701 [which called for all Lebanese militias to be disarmed after the 2006 war] had failed.

Hizbullah is back to its prewar strength and maybe even beyond it because it has not been made to disarm. The situation in southern Lebanon and on our northern border is very fragile—literally explosive.

Is Barak warning that Israel might have to go into Lebanon again?
I think Barak is warning the international community of the explosiveness of the situation [in case] there is a new flare-up.

Has the ceasefire [with Hamas] eliminated the possibility of Israel entering Gaza?
I think we will give the ceasefire a chance, but we are very fearful that at the end of the day, it will be used by Hamas to rearm, regroup and resume their hostile attacks against Israel. When we left Gaza, we expected the Palestinians to take care of their own people. Instead they turned Gaza into a terror base and a launching pad for missiles against Israel. Which proves once again that they never miss an opportunity to miss an opportunity.

In the United Nations, you were supposedly isolated, but in reality you had wide contacts with the Arab ambassadors, some of whose countries had no relations with yours.
I believe very much in engagement. When I came here, one of my aims was to engage as many of my colleagues as possible, especially those who represent countries which … sometimes are perceived as hostile to Israel. I am very gratified that I managed to establish close relations with some of my Arab and Muslim colleagues.