This comes as Iran threatened to stop cooperating with the United Nations atomic watchdog over its controversial nuclear program.
Foreign Minister Manouchehr Mottaki said "all voluntary means of cooperation" would end if Iran was referred, possibly indicating a halt to snap UN checks of its nuclear sites or even a resumption of uranium enrichment.
Following talks with Ms Merkel in Washington, Mr Bush said it would be a logical step to refer "a country which has rejected diplomatic" efforts to end the standoff to be referred to the Security Council.
But he said he and the German leader are seeking to resolve the issue diplomatically by working together.
He refused to be drawn on whether the Security Council should impose sanctions on Iran, speaking at a joint appearance with Ms Merkel at the White House.
"Iran armed with a nuclear weapon poses a grave threat to the security of the world," said Mr Bush, recalling comments made by hardline Iranian President Mahmoud Ahmadinejad last year calling for Israel to be wiped from the map.
The European Union trio of Britain, France and Germany have not been able to successfully negotiate with Iran to reach a resolution, and Ms Merkel said they want to work with the US to persuade other nations to join their stance.
"And we will certainly not be intimidated by a country such as Iran," she said.
Foreign ministers from the three EU countries on Thursday called for the UN to deal with Iran's nuclear program.
Officials from the EU are expected to join delegates from the US, China and Russia in talks in London on Monday, when they are expected to set a date for a crunch meeting of the International Atomic Energy Agency (IAEA).
British Foreign Secretary Jack Straw said agreement is growing among the international community for action but that the military option is not being considered.
But China's UN envoy Wang Guangya has warned that referring Iran to the UNSC might lead Tehran to harden its stance.
"Our concern is that referring them might complicate the issue," he said.
Moscow, which has been trying to reach a compromise with Iran on uranium enrichment by carrying out the process on its soil, again urged Tehran to resume a moratorium on nuclear research and cooperate with the IAEA.
Iran remains defiant
Iran is continuing to insist that its nuclear program is for peaceful purposes only.
President Ahmadinejad vowed not to give "one iota" on the program, particularly efforts to master the fuel cycle.
"They (the Europeans) tell us to give up nuclear energy (development) and in return promise to give us the nuclear fuel... but they do not even give us vital medicines, how can we trust them," the ISNA news agency quoted him as saying.
"If the dossier is sent to the Security Council, the European countries will lose the means which are currently at their disposal," Foreign Minister Mottaki said, according to a report by the official IRNA news agency.
"The government will be obliged, in conformity with the law adopted by parliament, to end all its voluntary measures of cooperation," he warned, referring to a new law obliging the government to cease "voluntary and non-legally binding measures and implement its scientific, research and executive programs" if the Security Council gets involved.
While threatening to halt cooperation, Iranian officials have nevertheless signalled their willingness to continue negotiations -- on their terms.
Mr Mottaki urged the Europeans to deal with Iran's nuclear activities with "discretion, patience and a rational attitude" and has urged the EU not to link research activities and the actual production of fuel.
Tehran has said uranium enrichment on an industrial level is still suspended but it has not made a secret of its desire to resume the activity in the near future.