Grand Ayatollah Hossein Ali Montazeri, an architect of the Islamic revolution, was among Iranian leaders who endorsed the 444-day occupation of the US embassy shortly after Iran's 1979 Islamic revolution, when 52 Americans were taken hostage.
The event led Washington to break diplomatic ties, which Montazeri said should now be restored.
"The nuclear row should be resolved through direct talks with America to avoid a war. Talks about a possible military action should be taken seriously," Montazeri told pro-reform students on Friday in remarks faxed to Reuters on Tuesday.
Criticizing the handling of Iran's nuclear policy is unusual and sensitive because it is seen as a matter of national security.
Increasingly angry rhetoric between Washington and Tehran has sparked speculation about a possible US military attack against Iran over its refusal to halt sensitive atomic work, which the West says is a cover to build atomic bombs.
Tehran insists its atomic work is peaceful.
Iranian officials have dismissed the threat of US military action and President Mahmoud Ahmadinejad has called it a US "dream". Iran says it is fully prepared to defend itself, warning Washington of a "quagmire deeper than Iraq."
Montazeri said Iranian authorities were mistaken if they believed "an attack would rally Iranians to the leadership as they did during the 1980-88 Iran-Iraq war".
Supreme Leader Ayatollah Ali Khamenei has the last say on all state matters, including the nuclear issue.
"People have changed. They are not willing to sacrifice their lives like they did during the Iraq war," said Montazeri, who was kept under house arrest in Shiite Iran's holy city of Qom from 1998 until 2003.
Iran's biggest reformist party last month also warned of an escalating crisis with the international community, calling for a review of Tehran's nuclear policy.
'Illegal and unIslamic'
Montazeri was hailed as "the fruit of my life" by Ayatollah Ruhollah Khomeini, late founder of the revolution, who designated him as his successor. Montazeri fell from grace in 1988 after criticizing Iran's rulers.
Montazeri criticized the clerical establishment for "repression", saying the harsh sentences given to political prisoners by the judiciary were "illegal and unIslamic".
"It is against the constitution," said Montazeri, who was one of the writers of Iran's constitution.
Pro-reform students and academics have criticized Ahmadinejad, who came to power in 2005, for clamping down on dissidents but the president and his government insist they support free speech and welcome constructive opposition.
Students and activists say some of those who have spoken out against Ahmadinejad and his government have been detained or blacklisted from university courses.