Iran escalating efforts to destabilize region -Panetta

"There is no question when you start passing MANPADS around, that becomes a threat, not just to military aircraft but to civilian aircraft," Panetta told the newspaper in an interview. "That is an escalation."

MANPADS are shoulder-fired anti-aircraft missiles. Western officials have worried about the spread of such weapons and the risk they pose to airline passengers as well as to military helicopters and jets.

Yemeni forces intercepted a ship on Jan. 23 carrying a large cache of weapons - including surface-to-air missiles - that U.S. officials suspect were being smuggled from Iran and destined for Yemeni insurgents.

"It is one of the first times we have seen it," Panetta said, referring to the seizure of MANPADS.

A Defense Department spokesman was not immediately available for comment on Panetta's remarks to the paper.

Yemen's government said the arms intercepted aboard the ship off the country's coast also included military-grade explosives, rocket-propelled grenades and bomb-making equipment.

Iran denies any interference in Yemen's affairs.

Panetta said the United States was stepping up efforts to counter the Iranian threat, and was leading a multinational exercise in the United Arab Emirates through Thursday to improve the interdiction of Iranian arms and other weapons.

He called the exercise critical to building up Arab capabilities to help halt Iranian arms transfers, including the smuggling of MANPADS.

U.S. officials have said the anti-aircraft weapons intercepted on Jan. 23 likely were headed to northern Yemen's Houthi separatists, who are fighting the U.S.-backed government in Sanaa and have also clashed with Saudi forces.

Panetta is preparing to step down as defense secretary after 19 months in the job.

The Senate Armed Services Committee held a hearing on Thursday on the nomination of former Republican Senator Chuck Hagel to succeed Panetta. (Writing by Doug Palmer; Editing by Peter Cooney)