Citing a worldwide erosion of confidence, Annan urged states to build a system for sharing atomic power that reduces nuclear threats.
Annan said the 35-year-old Nuclear Nonproliferation Treaty (NPT) regime is under stress caused by globalization, terrorism, and the spread of technology.
He told the conference reviewing the treaty that concerns surrounding nuclear programs such as Iran's were of special concern.
"States that wish to exercise their undoubted right to develop and use nuclear energy for peaceful purposes must not insist that they can only do so by developing capacities that might be used to create nuclear weapons," Annan said. "Those same states should not be left to feel that the only route to enjoying the benefits of nuclear energy is a domestic fuel-cycle capability."
Annan said there should be an agreement to create incentives for states to voluntarily stop the development of fuel-cycle facilities, an issue that is under discussion between Iran and European states. He stressed that a failure to reach such an agreement could trigger a race for nuclear weapons technology.
"The regime will not be sustainable if scores more states develop the most sensitive phases of the fuel cycle and are equipped with the technology to produce nuclear weapons on short notice and of course each individual state that does this only will leave other to feel that they must do the same," Annan said.
The director-general of the International Atomic Energy Agency, Mohammad el-Baradei, in turn proposed putting nuclear fuel production under multilateral control. He also repeated a call for a temporary moratorium on new fuel-cycle facilities while states negotiate a new system of international controls.
"Improving control over facilities capable of producing weapons-usable facilities will go a long way towards establishing a better margin of security," el-Baradei said. "We should be clear there is no incompatibility between tightening controls for the nuclear fuel cycle and expanding the use of peaceful nuclear technology."
But divisions among NPT signatories signal there will be no quick solution to the dispute over developing peaceful nuclear technology.
Just days before the UN conference began, Iranian officials said they could end a suspension of their once-secret nuclear-energy program. They are pressing for progress in talks with three European states, which have offered economic incentives in exchange for Tehran freezing nuclear fuel enrichment activities.
U.S. officials at the conference will press President George W. Bush's call for the world's leading nuclear exporters to condition access to nuclear fuel for other states on their renunciation of enrichment and reprocessing. Facilities capable of uranium enrichment can also produce material for nuclear weapons.
U.S.-Iran: Showdown Looms At Conference In New York