William Hague told MPs there was "grave concern" about the actions of the Iranian government as a Conservative MP claimed the country was "the new Soviet Union."
Answering an urgent question from Tory MP Robert Halfon in the House of Commons on the EU sanctions imposed on Iran by EU on Monday, the foreign secretary said: "Sanctions are a means to an end not an end in themselves.
"We are ready to talk at any point if Iran puts aside its pre-conditions and returns for negotiations."
Halfon praised the UK government saying they "could not have done more" to try and contain Iran, adding: "No-one wants war but tragically it is looking increasingly possible."
"The question must now be asked, are we facing the prospect of a nuclear dictatorship in the Middle East?"
William Hague admitted there was a "very serious danger of wider proliferation of nuclear weapons across the Middle East" if Iran develops a nuclear weapon.
Hague's words came after Philip Hammond said the UK could send military reinforcements to the Gulf if the dispute with Iran escalates
The defence secretary told journalists the decision to send HMS Argyll as part of an international flotilla of warships through the sensitive Strait of Hormuz on Sunday sent a "clear signal" to Tehran.
Hague told the Commons it would be a mistake if Iran closed the Strait of Hormuz, as many of their oil exports go through the region.
"It must be borne in mind that 95% of Iran’s oil exports, representing over 80% of its foreign earnings, transit the Strait of Hormuz. It is very much against Iran’s interests to seek to close the Strait to oil exports," he said.
He added that Britain maintains a "constant presence in the region as part of our enduring contribution to Gulf security".
"At the weekend HMS Argyll and a French vessel joined a US carrier group transiting through the Strait of Hormuz. This was a routine movement but it underlined the unwavering international commitment to maintaining rights of passage under international law.
"Any attempt by Iran to block the Strait would be both illegal and unsuccessful."
Prime minister David Cameron, Angela Merkel and Nicolas Sarkozy have issued a statement amid EU oil sanctions imposed against Iran on Monday.