BBC
In a speech in Washington, he said Israel was not entirely to blame, referring to an "international campaign" to isolate it.
Mr Panetta called on Israel to restart peace talks with the Palestinians.
He added that the US remained committed to Israel's security and would not allow Iran to acquire nuclear weapons.
"Unfortunately, over the past year, we've seen Israel's isolation from its traditional security partners in the region grow, and the pursuit of a comprehensive Middle East peace plan has effectively been put on hold," he said.
Israel's concern over the Arab Spring revolts that have toppled several long-term authoritarian leaders in the region, including in peace partner Egypt, was understandable, he added.
But the changes in leadership offered an opportunity for Israel to improve regional security.
"For example, Israel can reach out and mend fences with those share an interest in regional security, countries like Turkey and Egypt, as well as Jordan," he said.
Egypt and Jordan are the only Arab nations to recognise Israel. Israel is closely watching the election process in Egypt, where Islamist parties have done well after the first round.
Relations with Turkey, which recognised Israel in 1949, have soured since Israeli soldiers boarded an aid convoy challenging the naval blockade of Gaza last year, resulting in the deaths of nine Turks.
'Last resort'
The peace process with the Palestinians has been stalled for more than a year, bedevilled by continuing Israeli settlement construction in occupied territories and by the Palestinians' bid for full membership of the United Nations.
Mr Panetta said Israel should "lean forward on efforts to achieve peace with the Palestinians".
"Rather than undermining the Palestinian Authority, it is in Israel's interests to strengthen it by... continuing to transfer Palestinian tax revenues and pursuing other avenues of co-operation," he said.
When asked by an audience member after his speech what Israel could do to get the peace talks restarted, he said: "Just get to the damn table."
"The problem right now is we can't get them to the damn table."
He said a nuclear-armed Iran posed the greatest threat to the security and prosperity of the Middle East.
President Barack Obama had not ruled out using military action to prevent Tehran from acquiring nuclear weapons, but Mr Panetta said a strike would only delay its nuclear programme by one or two years.
He said military action was a "last resort".
Leon Panetta spoke about how ''Israel's isolation'' had grown in the region
US Defence Secretary Leon Panetta has urged Israel to "mend fences" with Turkey, Egypt and others in the Middle East to reduce its growing isolation.
Mr Panetta called on Israel to restart peace talks with the Palestinians.
He added that the US remained committed to Israel's security and would not allow Iran to acquire nuclear weapons.
"Unfortunately, over the past year, we've seen Israel's isolation from its traditional security partners in the region grow, and the pursuit of a comprehensive Middle East peace plan has effectively been put on hold," he said.
Israel's concern over the Arab Spring revolts that have toppled several long-term authoritarian leaders in the region, including in peace partner Egypt, was understandable, he added.
But the changes in leadership offered an opportunity for Israel to improve regional security.
"For example, Israel can reach out and mend fences with those share an interest in regional security, countries like Turkey and Egypt, as well as Jordan," he said.
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Leon Panetta US Defence SecretaryThe problem right now is we can't get them to the damn table”
"And if the gestures are rebuked, the world will see those rebukes for what they are."
Relations with Turkey, which recognised Israel in 1949, have soured since Israeli soldiers boarded an aid convoy challenging the naval blockade of Gaza last year, resulting in the deaths of nine Turks.
'Last resort'
The peace process with the Palestinians has been stalled for more than a year, bedevilled by continuing Israeli settlement construction in occupied territories and by the Palestinians' bid for full membership of the United Nations.
Mr Panetta said Israel should "lean forward on efforts to achieve peace with the Palestinians".
"Rather than undermining the Palestinian Authority, it is in Israel's interests to strengthen it by... continuing to transfer Palestinian tax revenues and pursuing other avenues of co-operation," he said.
When asked by an audience member after his speech what Israel could do to get the peace talks restarted, he said: "Just get to the damn table."
"The problem right now is we can't get them to the damn table."
He said a nuclear-armed Iran posed the greatest threat to the security and prosperity of the Middle East.
President Barack Obama had not ruled out using military action to prevent Tehran from acquiring nuclear weapons, but Mr Panetta said a strike would only delay its nuclear programme by one or two years.
He said military action was a "last resort".
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