* Barak says US ties never been better but skeptical on sanctions
* Israel fears "zone of immunity" when bombs can't penetrate Iran facilities
* Obama strengthens sanctions, funds "Iron Dome" rocket shield
By Phil Stewart and Dan Williams
JERUSALEM, Aug 1 (Reuters) - Israel told visiting U.S. Defense Secretary Leon Panetta on Wednesday that time was running out for a peaceful settlement to the nuclear dispute with Iran because sanctions and tough talk over possible military action were failing to sway Tehran.
Speculation is rampant over whether Israel will make a military strike against Iran to halt a nuclear program that the West suspects is aimed at building an atomic bomb but which Tehran says is entirely peaceful.
Panetta assured Israel that the United States would not allow Iran to develop a nuclear bomb. Using a tough tone, he suggested military action was possible after all other options were exhausted.
"This is not about containment. This is about making very clear that they are never to be able to get an atomic weapon," Panetta said in Jerusalem.
"If they make the decision to proceed with a nuclear weapon...we have options that we are prepared to implement to ensure that that does not happen," said Panetta, whose visit to the close U.S. ally included a tour of an anti-rocket battery known as "Iron Dome".
Israeli Prime Minister Benjamin Netanyahu signalled that such declarations were of little comfort.
"However forceful our statements, they have not convinced Iran that we are serious about stopping them," Netanyahu said, standing next to Panetta at the prime minister's residence in Jerusalem.
"Right now the Iranian regime believes that the international community does not have the will to stop its nuclear program. This must change, and it must change quickly because time to resolve this issue peacefully is running out."
Any conflict could easily draw in the United States, where debate over Israel and Iran figures in campaigning for the presidential election in November. Republican candidate Mitt Romney visited Israel this week.
The Jewish state - which declines to confirm its own suspected nuclear arsenal - says little time remains before Iran achieves a "zone of immunity" in which Israeli bombs would be unable to penetrate deeply buried uranium enrichment facilities.
The United States has more potent weapons that would allow more time for the sanctions push to work.
Israeli Defense Minister Ehud Barak, speaking at a news conference with Panetta, said the chances that sanctions would ultimately force Tehran's hand were extremely low.
"We have clearly something to lose by this stretched time (during) which sanctions and diplomacy takes place because the Iranians are moving forward, not just in enrichment," Barak said, possibly referring to missile development.
Panetta's trip to Israel showcased the strong security ties between the two countries. Barak said those relations had never been better despite Israel's misgivings over the Iran strategy pursued by Washington and other world powers.
Romney, on a visit to Israel that ended on Monday, said "any and all measures" must be used to keep Iran from developing a nuclear weapon.
Even as it strengthens sanctions, Washington is bolstering Israeli defences.
Obama last week announced he was releasing $70 million in approved funding for Iron Dome, a protection against Palestinian rockets that is backed by the powerful U.S. pro-Israel lobby. On Tuesday, he laid out new U.S. sanctions against foreign banks that help Iran sell its oil.
Obama received 78 percent of the Jewish vote in the 2008 election but a nationwide Gallup poll in June showed him down to 64 percent backing versus Romney's 29 percent.
The political jousting on the U.S. campaign trail is mirrored in Israel, whose media have reported misgivings among the military top brass about going it alone against Iran. Speculation is rife that Netanyahu wants to take action ahead of a possible Obama reelection in November.
"The struggle behind the scenes over attacking Iran is reaching a boiling point," the liberal Israeli daily Haaretz wrote in a front-page analysis.