Gates, speaking to the American Chamber of Commerce in Egypt, said some that while some progress had been made toward reconciliation it has not been fast enough.
A political solution could come quickly, Gates said, pointing out that there are not "thousands in the street" in Iraq trying to kill each other. The violence is mostly confined to death squads, al-Qaeda terrorists and former members of Iraq’s ruling class, the Baath party.
"These are not mass movements," he said.
In a speech to the chamber, Gates warned that failure in Iraq would spill over its borders.
"The first and secondary effects of a collapse in Iraq ââ¬â with all of its economic, religious, and geopolitical implications ââ¬â will be felt in capitals and communities of the Middle East well before they are felt in Washington or New York."
Gates, who also met earlier with Egyptian President Hosni Mubarak, told the audience that Iran represents another threat to regional stability.
He noted that he had advocated as a private citizen reaching out to Iran. But he said Iran’s recent actions, such as the seizure of British sailors in the Persian Gulf, demonstrate the limits of negotiation.
"We should have no illusions about the nature of this regime ââ¬â or about their designs for their nuclear program, their intentions for Iraq, or their ambitions in the Gulf region," Gates said.
Resolving problem in Iraq and Iran, Gates said, will require expanded trade in the region, peace between the Israelis and Palestinians and giving citizens a greater stake in their governments.
A Congressional Research Service report last year said the United States differs with Egypt on the pace of Egypt’s economic reforms. It added that "many U.S. officials argue that Egypt is not moving quickly enough toward full democracy or in improving the human rights situation."
Gates challenged Egypt to take a leadership role in defeating terrorist networks, holding Iran accountable and reviving the Israeli-Palestinian peace process.