They also reviewed the bilateral relations and expressed resolve to increase co-operation in political, economic and trade for the mutual benefit of the two countries.
Prime Minister Shaukat Aziz said the talks covered a whole gamut of bilateral relations exploring new vistas of co-operation.
He said they also discussed Iran-Pakistan-India gas pipeline project and emphasised that it would improve the atmosphere in the region and generate economic activities.
President Khatami described the talks as productive and very satisfactory. He said the two countries would further enhance all round co-operation to its maximum potential.
Earlier, the Prime Minister met the Iranian First Vice-President Dr Reza Aref.
Soon after the official welcome ceremony at the Islamic Republic Mansion (Islami Jamhoori Building), the Prime Minister said that both Iran and Pakistan were for peace in the region.
"We are not here as mediators, we want peace in the region so that we can share common values," he told newsmen here.
"We are here to talk each other as brothers. Iran is fully capable of handling its own situation, he said when asked if the two leaders would also discuss the Iran-United States stand-off on the nuclear issue.
Pakistan and Iran, he said, need to work with each other towards their growth in a peaceful, cordial manner. He said Pakistan had offered India an energy corridor.
It initially expressed reservations as the pipeline had to pass through Pakistan, however, a week back, the Indian cabinet agreed on the project.
"This will create a good atmosphere for more closer co-operation between these countries," he added.
He said Pakistan requires gas to meet its growing energy needs and is looking at various options, including the gas from Iran.
He referred to the meeting of the joint economic commission of the two countries and said it would open up new vistas for co-operation in trade and commerce and strengthen ties between the two countries.
Dr Reza Aref said Iran has always given priority to its ties with Pakistan and the two countries had many commonalties.
"The enhancement of relations between Pakistan and Iran will boost regional stability and promote South-South co-operation."
He appreciated the assistance Pakistan extended to Iran in the aftermath of the recent earthquake.
He welcomed the Prime Minister to Iran and hoped the friendly and brotherly relations between the two would improve.
Prime Minister Aziz said the two countries share common values, hoped the visit would further strengthen the existing deep-rooted ties between the two countries and bring them closer.
The Prime Minister, who arrived here on a three-day official visit to the Islamic Republic of Iran, was received at Mehrabad airport by Rahmati Minister of Road and Transport, Iran's ambassador to Pakistan Mohammad Ebrahim Taherian, Pakistan's ambassador to Iran Iqbal Ahmed Khan and Pakistanis in Iran.
The airport building and the route were decorated with flags of Pakistan and Iran.
Prime Minister is accompanied by Balochistan Governor Awais Ghani, Minister for Narcotics Control Ghaus Bux Khan Mehr, Petroleum and Natural Resources Minister Amanullah Khan Jadoon and Religious Affairs Minister Ijazul Haq as well as Minister of State for Interior Dr Shahzad Waseem and Export Promotion Bureau chairman.
Addressing a meeting of Pakistani and Iranian business community here at the Tehran Chamber of Commerce and Industries, the Prime Minister said the future of Pakistan-Iran ties was in their strong economic relations and with the operatianalisation of the Preferential Trade Agreement (PTA).
He said with the PTA, the two countries would enjoy lower tariffs and increased exports from either side.
He said Pakistan can offer rice, engineering and surgical goods, besides many other items to Iran, while it can get petroleum products, household goods from Iran.
"It is now up to the private sector to seize this opportunity," he added.
Prime Minister Aziz offered Iran to open a bank in Pakistan and said a joint investment company can also go a long way in building stronger economic relations between the two countries.
Referring to the $4.5 billion natural gas pipeline project, the Prime Minister said the country's gas requirements were increasing and it was looking at various options to import gas.
He said India initially had placed too many conditionalities, but now it has indicated that it would come forward on the project without any pre conditions.
He said even without Indian participation, Pakistan was willing to go ahead, but with India showing signs of willingness, the project has become more viable.
He said Pakistan was looking at the Iran-Pakistan, Qatar-Pakistan, Turkmenistan-Pakistan gas pipelines and LNG import and will have to opt for two or three of the options to meet its needs.
The Prime Minister called for increasing road, rail, shipping and air links between the two countries and said it would lead to increased economic activity, which he said has not been tapped to its full potential.
He said the two countries have been part of the ECO, but regretted that the organisation has not been able to contribute substantively in increased economic activities.
He said road and rail links with Iran would open up Pakistan to Turkey and beyond to the European markets.
He said the two countries were studying options to open up three more border points which, he said, together with lower tariffs cut smuggling. He said in Pakistan the average tariff rates were 12 percents with the highest slab at 25 percents.
He said Pakistan today offered numerous incentives for investors. The Pakistan of today is not the Pakistan of yesterday, he added.
He said a number of sectors were available for investment including hotels, real estate, textile and IT. He also asked Iranian contractors to participate in bidding in the projects in Pakistan.
Referring to the economic achievements back homes, the Prime Minister said the middle-class in the country was expanding. He admitted that there were some inflationary pressures, but said figures would remain below the two digit mark.
He said over the past five years since the government of President General Pervez Musharraf, there has been real progress in all economic areas.
He said the government has focused on deregulation and was going ahead with privatisation as it believed "it is not the business of the government to be in business".
Pakistan's economy is now a model for developing countries and has begun to achieve results.
The country, he said, is now entering the second generation of reforms and the government was focusing on human and skill development.
Later during the question, answer session, Prime Minster Aziz said consistency and continuity of government policies was the priority.
He said the country was following labour laws of the International Labour Organisation.
He also gave on-the-spot instructions for assisting Pakistani and Iranian businessmen who are engaged in business activity between the two countries.
Prime Minister Shaukat Aziz on Tuesday visited mazar of spiritual leader of Iran Ayatollah Khomeni.
The Prime Minister and members of his entourage laid a wreath at the mazar of Imam Khomeni and offered Fateha.
Talking to newsmen following his meetings with the Iranian leadership Shaukat said that Iranian response on the gas pipeline project was very positive.
The Prime Minister said everybody is looking at the gas pipeline project very favourably. He said Pakistan wants to create interdependency among various regional countries.
Shaukat Aziz said Pakistan is looking forward to import gas for meeting its energy requirement and Iran is one of them.
The Prime Minister said a high-level meeting is scheduled in Islamabad next month to take the gas pipeline project further forward.
He described talks with President Syed Muhammad Khatami as very substantive.
Prime Minister Shaukat Aziz said good discussions were held with the Iranian president and the first vice president.
The Prime Minister said that the two countries have very close historic relationship and Pakistan is trying to further expand economic ties in terms of trade and investment.