HUNTSVILLE, Ontario, June 26 (David Ljunggren/Reuters) - The Group of Eight rich nations on Saturday pressed Israel and the Palestinians to work for direct peace talks, and said conditions in Gaza under an Israeli blockade were not sustainable and must be changed.

The G8 flagged mounting worries over North Korea's nuclear program, asking all nations to enforce existing UN sanctions against Pyongyang and expressing gravest concern about the nuclear test and missile activities carried out by the North Korean government.

North Korea does not, and cannot, have the status of a nuclear-weapon state in accordance with the Nuclear Non-Proliferation Treaty, it said.

The rich nations club, which also includes Britain, Canada, France, Germany and Italy, also called on all nations to fully implement new UN sanctions on Tehran over its atomic program, which Western nations fear is aimed at producing weapons.

We are profoundly concerned by Iran's continued lack of transparency regarding its nuclear activities and its stated intention to continue and expand enriching uranium, including to nearly 20 percent, the communique said.

Leading G8 nations helped shepherd through this month's new UN sanctions against Tehran -- hoping to boost pressure on Iranian leaders who have nevertheless vowed to keep promoting an atomic program they say is purely for peaceful purposes.

French President Nicolas Sarkozy said western nations were still willing to talk to Tehran, but would meanwhile push for even stronger unilateral sanctions as the United States and the European Union have already done.

France wants even more severe sanctions on financial transactions and the reduction of imports of Iranian crude oil, Sarkozy told a news conference.

'IMPORTANT OPPORTUNITY' FOR AFGHANISTAN

The G8 leaders agreed that Afghan President Hamid Karzai would have an important opportunity at a conference next month in Kabul to show he is making good on pledges to improve governance and security as the nearly nine-year-old war in Afghanistan enters a pivotal phase.

With U.S. forces in Afghanistan due to hit 100,000 this summer and allies contributing a further 47,000 soldiers, Western countries are eager for signs of progress that will allow them to begin pulling out soldiers on schedule.

The war is widely unpopular, and doubts have grown about the overall strategy after President Barack Obama this week fired his top Afghan commander, General Stanley McChrystal, in the wake of an inflammatory magazine article.

Everybody recognizes that the challenges there remain significant ... (and) pretty severe, Canadian Prime Minister Stephen Harper said at news conference.

I think there's a general recognition around the G8 table that we have to continue to put our shoulder to the wheel to ultimately ensure that what we leave behind is a stable Afghanistan ... and not a potential source of terrorism or a potential failed state.

The G8 statement said it fully supported Karzai's efforts to strike a peace deal with moderate elements of the Taliban and said more credible and transparent parliamentary elections in September would mark a step forward for Afghan democracy.

The G8 urged both Israel and the Palestinians to keep working toward to direct peace talks, and expressed regret over the May 31 incident off Gaza that saw nine pro-Palestinian activists killed when Israeli commandos stormed an aid flotilla, earning international condemnation.

The group welcomed Israel's decision to set up an independent public commission to investigate the incident, and urged Israel to fully implement a decision to begin relaxing the blockade imposed on Hamas-ruled Gaza some three years ago.

The current arrangements are not sustainable and must be changed, the communique said.

(Reporting by the Reuters G20 team; Writing by Andrew Quinn, Editing by Peter Cooney)