MADRID -- The Iranian president, on a state visit to Spain Tuesday, said the U.S. handling of terror has intensified international terrorism, noting Washington's hardline stance had only strengthened Osama bin Laden's appeal in the Islamic world.

"The mistaken policy of the United States has resulted in Bin Laden having more support in the Islamic world," Iranian President Mohammad Khatami said at a joint press conference with Spanish Prime Miniter Jose Maria Aznar.

U.S. policy has "caused the Islamic trend based on wisdom and favoring democracy ... to weaken, and with their hegemony the United States has strengthened Bin Laden," Khatami said.

He said Bush's "axis of evil" label last January was itself a "manifestation of fundamentalism" and suggested the U.S. president "had realized he committed a great error" soon afterwards. Comparing Bin Laden's rhetoric to that of the U.S., he deplored "a logic that on one side produces terror and on the other, in the guise of fighting terror, creates the worst form of violence in the world."

Khatami also repeated Tehran's opposition to a unilateral U.S. attack on Iraq. "We have said several times that we are against any military attack on Iraq (even though) we have been victims of the Iraqi government," he said.

But Khatami stressed that Iraq, Iran's neighbor with whom it fought its own protracted war for much of the 1980s, must uphold UN resolutions seeking to ensure it was not developing weapons of mass destruction.

"Iraq must respect United Nations resolutions," AFP quoted Khatami as saying on the second day of his visit here.

"If there is a change (of government) in Iraq, it must be done according to the will of the Iraqi people" without outside interference, he said.

Bush has turned up the pressure on the UN Security Council to come up with a tough new inspections regime aimed at disarming Baghdad. But Bush -- armed with a congressional go-ahead for the use of military force if necessary -- has repeatedly warned he will act unilaterally if the UN fails to take action.

Aznar said "the UN Security Council must assume its responsibilities and be respected".

"It seems reasonable to me that a new resolution demands that we reach the goal of disarming Iraq," he said.

Madrid sees Khatami's visit here as critical for both bilateral and EU-Tehran ties, the latter revived under Spain's tutelage as European Union president the first half of this year.

Though a strong U.S. ally since September 11, Spain upholds EU policy to counterbalance the U.S. view of Iran, and with other EU states has courted the Islamic Republic.

Though U.S.-Tehran ties have been severed since the 1979 Islamic Revolution, tentative overtures have been made to change this.

Khatami said "good-will steps Iran has made have not received an adequate response from the United States," pointing notably to more than 250 arrests Iran made on its territory of Al-Qaeda suspects during the U.S. intervention in Afghanistan.

Outside talks on international matters, Khatami and Aznar signed several bialteral accords, notably on investment protection, tourism and customs issues.

Bilateral trade is small, at just over 1.2 billion euros (dollars) annually with the balance in Iran's favor.

Meanwhile, Cristina Gallach, spokeswoman for EU high representative for the Common Foreign and Security Policy Javier Solana, said the current visit of President Khatami to Spain ''is another sign of the cooperation which is growing between the EU and EU member states and Iran.'' ''We consider this trip a very important one. It takes place a few months after the trip of Mr. Solana to Iran and a few months after the visit of President Khatami to Austria,'' Gallach said in an exclusive interview with IRNA in Brussels Tuesday.

Solana and Khatami also met in Vienna.

''Undoubtedly this is a process of deepening the relationship which we consider would be very beneficial for the EU and for Iran as well,'' she said.

Both Solana and Gallach hail from Spain.

''Undoubtedly one part is deepening of the economic ties and the other part is political relations. Both of them we consider very important. It will undoubtedly have an impact as well in the process of strengthening relations between Iran and the EU,'' she said.

Gallach said there are issues which are ''complex and difficult'' and which are also part of the ongoing EU-Iran discussions, such as human rights, cooperation in the fight against terrorism and cooperation in the Middle East.

Gallach noted that relations between Spain and Iran are growing.

She pointed out that President Khatami has been welcomed at the highest level by the king and queen of Spain.

''It is an important signal of growing relationship and I would underline on both parts, the political including all aspects and economic as well,'' stressed Gallach.

President Khatami, on the second day of his official visit to Spain also visited the tomb of an unknown Spanish soldier to pay his respects.

Before laying a wreath on the tomb, President Khatami and his accompanying delegation stood in silence as the national anthems of the two countries were played.

Iran's Foreign Minister Kamal Kharrazi and Finance Minister Tahmasb Mazaheri are in the delegation accompanying the Iranian president.