NASHVILLE, Tennessee (Reuters) - U.S. presidential candidates Republican John McCain and Democrat Barack Obama both said on Tuesday they would work if elected to toughen sanctions on Iran to stop it acquiring nuclear weapons.

The two candidates outlined sharp foreign policy differences during the second of three televised debates in Nashville, Tennessee, but both agreed that Iran should not be allowed to build an atomic bomb.

The United States and other Western powers suspect Tehran is seeking a nuclear bomb under cover of its civilian nuclear program. Iran, the world's fourth-largest oil producer, says it wants to generate electricity only for civilian use and has resisted international efforts to get it to halt its uranium enrichment work.

"We cannot allow Iran to get a nuclear weapon, it would be a game-changer in the region," Obama said. "Not only would it threaten Israel ... but it would also create the possibility of nuclear weapons falling into the hands of terrorists."

Obama said that if elected on November 4 his administration would push to tighten sanctions on Iran and restrict gasoline imports to the Islamic Republic, which suffers a shortage of refined fuel.

"If we can prevent them from importing the gasoline they need and the refined petroleum products, that starts changing their cost benefits analysis, that starts putting the squeeze on them," the Illinois senator said.

He reiterated that while he was prepared to engage in direct talks with Iran, military options were "not off the table."

McCain raised the specter of a nuclear arms race in the Middle East that would threaten the stability of the region and the security of Israel.

"If Iran acquires nuclear weapons all the other countries will acquire them too. The tensions would be ratcheted up," he said, before adding, "We can never allow a second Holocaust to take place."

The Arizona senator said he also favored working with the United States' allies to toughen sanctions to force the Iranians to "modify their behavior."

The United States, Britain, France, China, Russia and Germany gave Iran a beefed-up offer of political and economic incentives in June, including nuclear reactors, in exchange for suspending its uranium enrichment program.

Iran has shown no sign of compromise, however, vowing to resist U.S. "bullying" to force it to abandon its right to develop peaceful nuclear technology.

(Writing by Ross Colvin, Editing by Frances Kerry)