Rice sought to tighten the screws on Tehran after taking the unprecedented step of sending a top US diplomat to meet Iran's chief negotiator Saeed Jalili at international talks in Geneva.
The United States had until Saturday refused to sit with Iran on nuclear talks until it stopped enriching uranium, but changed course to show it was going the extra mile for a diplomatic solution.
The meeting sent a "very strong message to the Iranians that they can't go and stall ... and that they have to make a decision," Rice told reporters on her way to Abu Dhabi, capital of the UAE.
"It clarifies Iran's choices and we will see what Iran does in two weeks. But I think the diplomatic process now has a kind of new energy in it."
Six world powers have offered to start pre-negotiations during which Tehran would add no more uranium-enriching centrifuges and in return face no further sanctions -- the so-called "freeze-for-freeze" approach.
British Prime Minister Gordon Brown echoed Rice's warning in an address to the Israeli parliament.
"Iran now has a clear choice to make: suspend its nuclear programme and accept our offer of negotiations or face growing isolation and the collective response (of) not just one nation but of all nations round the world," Brown said.
"Just as we have led the work on three mandatory sanctions resolutions of the UN, the UK will continue to lead -- with the United States and our European Union partners -- in our determination to prevent an Iranian nuclear weapons programme."
Jalili and EU foreign policy chief Javier Solana hailed their talks as "constructive" but Solana lamented that Tehran had not given a final response to proposed incentives for Tehran to abandon its nuclear programme.
Jalili insisted on Monday that the issue of halting enrichment had not even been raised in the talks.
"The question of suspending enrichment was not discussed in Geneva, there were discussions on the different parties' approach to the continuation of the negotiations, their setting and their calendar," the official news agency IRNA quoted him as saying.
Rice said diplomacy offered the possibility of both negotiations and the "possibility of punitive measures."
"And we are in the strongest possible position to demonstrate that if Iran doesn't act, then it's time to go back to that track."
She was referring to the UN Security Council, which has so far imposed three rounds of sanctions on Iran.
Rice said she did not expect any "imminent action" as August is a slow month at the Security Council but expected work to begin soon after on drafting another round of "punitive measures."
The showdown has stirred fears of Israeli or even US military strikes against Iran, as US President George W. Bush has insisted Washington would keep all options on the table. It has also sent oil prices spiralling upward.
Rice -- who was heading to the UAE to discuss Iran, Iraq, Lebanon and the Middle East peace process -- said Washington would also look at other unilateral steps it can take to squeeze Iran's financial institutions.
Rice said Undersecretary of State William Burns' presence in Geneva helped strengthen diplomacy involving the five permanent UN Security Council members -- the United States, Russia, China, France and Britain -- as well as Germany.
The United States has in the past met resistance for tougher sanctions from Russia and China, which have strong economic ties with Iran.
Rice would not elaborate on prospects for setting up a US diplomatic presence in Iran for the first time since US-Iranian ties were severed in the wake of the Islamic revolution in 1979 and the seizure of US hostages.
But she said any effort to set up an "interests section" would focus on improving US contacts with the Iranian people.
"We have an interests section in Cuba, so I wouldn't read thawing of relations into anything," Rice said.
Rice said Burns would not return to talks with the Iranians in two weeks.