UPDATE 2-Saudi crown prince warns of escalation with Iran, prefers political solution

By Matt Spetalnick and Timothy Gardner

* Denies ordering Khashoggi killing, says he bears responsibility

* Warns oil prices could spike unless world unites to deter Iran

* Open to all initiatives for political solution to end Yemen war (Adds details)

By Matt Spetalnick and Timothy Gardner

WASHINGTON, Sept 29 (Reuters) - Saudi Arabia's crown prince warned in an interview broadcast on Sunday that oil prices could spike to "unimaginably high numbers" if the world doesn't come together to deter Iran, but said he preferred a political solution to a military one.

Speaking to the CBS program "60 Minutes," Mohammed bin Salman also denied ordering the killing of journalist Jamal Khashoggi by Saudi operatives last year, but said he ultimately bears "full responsibility" as the kingdom's de facto leader.

While Khashoggi's death sparked a global uproar and tarnished the crown prince's reputation, the Trump administration's tense standoff with Saudi arch-foe Iran has more recently dominated U.S. policy toward Riyadh, especially after Sept. 14 attacks on the heart of the Saudi oil industry.

"If the world does not take a strong and firm action to deter Iran, we will see further escalations that will threaten world interests," Prince Mohammed, known as MbS, said through a translator. "Oil supplies will be disrupted and oil prices will jump to unimaginably high numbers that we haven’t seen in our lifetimes."

In an interview conducted on Tuesday in Saudi Arabia, he said he agreed with U.S. Secretary of State Mike Pompeo that the attacks, which knocked out more than 5% of global oil supply, were an act of war by Iran.

But he said he preferred a peaceful resolution because regional war would collapse the global economy. The United States, European powers and Saudi Arabia have blamed the attacks on Iran, which denies involvement. Instead, Yemen's Iran-aligned Houthi group claimed responsibility.

MbS also said President Donald Trump should meet Iranian President Hassan Rouhani to craft a new deal on Tehran's nuclear program and regional activities.

Efforts to bring the two together last week at the United Nations failed. Tensions between Washington and Tehran escalated after the U.S. withdrew last year from a 2015 nuclear deal and reinstated sanctions against Tehran.


'ABSOLUTELY NOT'

Days before the anniversary of Khashoggi's murder, MbS said: "Absolutely not," when asked if he had ordered it. But he said he took full responsibility "since it was committed by individuals working for the Saudi government."

"This was a mistake. And I must take all actions to avoid such a thing in the future."

The CIA and some Western governments believe MbS ordered the killing, but Saudi officials have repeatedly said he had no role. Asked about the CIA assessment, MbS asked for "such information" to be revealed.

After initial denials, the official Saudi narrative blamed the murder on rogue operatives. The public prosecutor said then-deputy intelligence chief Ahmed al-Asiri ordered the repatriation of Khashoggi, a royal insider who became an outspoken critic, but the lead negotiator ordered him killed after discussions for his return failed.

Asked how the killing could have happened without him knowing about it, MbS said: "Some think that I should know what 3 million people working for the Saudi government do daily? It's impossible that the 3 million would send their daily reports to the leader or the second highest person in the Saudi government."

Eleven Saudi suspects have been put on trial in secretive proceedings. A U.N. report called for MbS and other senior Saudi officials to be investigated. Asiri and Saud al-Qahtani, a senior adviser, were fired over involvement in the operation. Asiri is standing trial, but Qahtani is not.

Asked how those two members of his inner circle could have been involved without him knowing, MbS said: "Today the investigations are being carried out. And once charges are proven against someone, regardless of their rank, it will be taken to court, no exception made."

Khashoggi, a Washington Post columnist, was last seen at the Saudi consulate in Istanbul on Oct. 2, where he was to receive papers ahead of his wedding. His body was dismembered and removed from the building. His remains have not been found.

Asked about prominent women activists who have been detained on charges related to human rights work and tarred by local media as traitors, including Loujain al-Hathloul, MbS said: laws "must be respected, until they are reformed."

He said it was up to the public prosecutor to release Hathloul but that he would personally follow up on accusations she had been tortured in prison.

Asked about criticism of Riyadh in the U.S. Congress over the Khashoggi killing, the activists' arrests and the Saudi-led military campaign in Yemen, which has taken a huge civilian toll, MbS said: "The (U.S.-Saudi) relationship is much larger than that."

Trump has resisted congressional efforts to block U.S. arms sales to Saudi Arabia.

MbS also repeated a Saudi call for Iran to halt its support for Houthi forces in Yemen and said he was open to "all initiatives for a political solution" to end the war there.

(Additional reporting by Stephen Kalin in Riyadh; Editing by Peter Cooney, Editing by William Maclean)