US urges Israel to end 'isolation in Middle East'
In a speech in Washington, he said Israel was not entirely to blame, referring to an "international campaign" to isolate it.
Mr Panetta called on Israel to restart peace talks with the Palestinians.
He said the US remained committed to Israel's security and would not allow Iran to acquire nuclear weapons.
"Unfortunately, over the past year, we've seen Israel's isolation from its traditional security partners in the region grow, and the pursuit of a comprehensive Middle East peace plan has effectively been put on hold," he said.
Israel's concern over the Arab Spring revolts that have toppled several long-term authoritarian leaders in the region, including in peace partner Egypt, was understandable, he added.
But the changes in leadership offered an opportunity for Israel to improve regional security.
"For example, Israel can reach out and mend fences with those share an interest in regional security, countries like Turkey and Egypt, as well as Jordan," he said.
"And if the gestures are rebuked, the world will see those rebukes for what they are."
Egypt and Jordan are the only Arab nations to recognise Israel. Israel is closely watching the election process in Egypt, where Islamist parties have done well after the first round.
Relations with Turkey, which recognised Israel in 1949, have soured since Israeli soldiers boarded an aid convoy challenging the naval blockade of Gaza last year, resulting in the deaths of nine Turks.
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