Washington (CNN) -- Former CIA acting director John McLaughlin said the United States can engage Iran through diplomacy, sanctions or military action, but warned the latter choice "would be a very bad option."
Speaking during a panel discussion in Washington Tuesday, McLaughlin, who served as acting director of the CIA in 2004, said direct military action with Iran could grow to involve Hezbollah, the militant group based in Lebanon.
"One of the reasons (military action is a bad option) is that Iran does have this relationship with Hezbollah. Hezbollah has not attacked American interests in recent years, but has lots of plans on the library shelf for doing that in the event we got into a confrontation with Iran," McLaughlin explained.
"And Hezbollah of course has been present in the United States, at least in fundraising. And so one of the big problems with Iran is if you get into an open confrontation, a military confrontation, you risk a cycle of retaliation and response with great difficulty seeing where the end point is," he added.
On another subject, McLaughlin said the 2011 U.S. drone killing of American-born Muslim cleric Anwar al-Awlaki has not had a big impact operationally on Al Qaeda in the Arabian Peninsula, the Yemen-based group in which al-Awlaki served as a spokesman.
McLaughlin said AQAP now controls, or exercises influence in, about half of Yemen and the group continues to have several worrisome characteristics.
"One, they move fast," he said. It took the group only two or three months to mobilize Umar Farouk AbdulMutallab, the so-called Underwear Bomber, charged in the Christmas Day 2009 bombing attack on a Northwest Airlines jet. McLaughlin called the plot a "pick-up game" that took the organization only two or three months to plan.
AQAP also knows how to spread terror economically, McLaughlin said. "They're cheap. Their (October 2010 toner cartridge) package bomb operation, by their own estimate, cost them about $4,200," he said.
And they have a strategy. They "basically attack us where they can," he said.
Speaking at the same forum, President Barack Obama's former national security adviser said he believes 2012 will be a pivotal year in dealing with Iran, which experts believe is creating materials for a nuclear weapon.
"I think 2012 has seen itself as the year that Iran has got to be dealt with one way or the other," said James L. Jones, who served as national security adviser from January 2009 until October 2010.
The Iranian nuclear threat jeopardizes Israel, could spark a nuclear arms race in the region, and could provide a way for a non-state actor to get a nuclear weapon, Jones said. "And if that happens, I think that the world that we live in changes dramatically."
Jones said Washington has successfully rallied nations to take economic sanctions against Tehran, and that other countries also are beginning to "really tighten the screws on Iran."
"I think Iran knows that. I think that's one of the reasons that we're seeing the bellicose behavior of Iranian forces in the Arabian Gulf, or threatening the Strait of Hormuz," he said.
McLaughlin and Jones spoke during a panel discussion sponsored by the Aspen Homeland Security Group.