"The killing has to stop and we need to find a way of putting in the appropriate reforms and moving forward," said Annan, who is due in Damascus on Saturday.
One Syrian opposition activist voiced alarm at Annan's call for dialogue, saying it sounded "like a wink at Bashar" that would only encourage Assad to "crush the revolution".
On a separate mission to Syria, U.N. humanitarian chief Valerie Amos said she was "devastated" by the destruction she had seen in the Baba Amr district of Homs city and wanted to know what had happened to its residents, who endured a 26-day military siege before rebel fighters withdrew a week ago.
Amos is the first senior foreign official to visit Baba Amr since the government assault, which activists said ended in reprisals by Assad loyalists. A Syrian Arab Red Crescent team that accompanied her there on Wednesday found few inhabitants among the ruins.
As world pressure on Syria mounted, the deputy oil minister announced his defection, the first by a senior civilian official since the start of a year-long popular uprising against Assad, whose Baath party marked 49 years in power on Thursday.
The minister, Abdo Hussameldin, 58, said he knew his change of sides would bring persecution on his family.
The Syrian pound fell as low as 100 pounds to the dollar from about 47 a year ago. Dealers said it had plunged about 13 percent in the last 24 hours on fears of U.S. military action.
Tunisia and Turkey, a neighbor of Syria, declared their opposition to intervention by any force from outside the region, and Annan argued against further militarization of the conflict.
Speaking in Cairo, the former U.N. chief said, "We should not forget the possible impact of Syria on the region if there is any miscalculation."
He added that he would ask the government and its opponents to come together to find a political settlement,
Tunisian President Moncef al-Marzouki said his country, which has offered Assad asylum to end the bloodshed, would be ready to join a possible Arab peacekeeping force in Syria.
His Turkish counterpart Abdullah Gul said no government could survive by using violence on its people.
Western powers have shied away from Libya-style military intervention in Syria, at the heart of a conflict-prone Middle East, but some U.S. lawmakers have asked how many Syrians must die before President Barack Obama's administration uses force.
Defense Secretary Leon Panetta on Wednesday defended U.S. caution, especially without international consensus on Syria, but said the Pentagon had reviewed U.S. military options.
Syrian activists say any prospects of a negotiated deal with Assad disappeared long ago in government repression that the United Nations estimates has cost well over 7,500 lives.
"We reject any dialogue while tanks shell our towns, snipers shoot our women and children and many areas are cut off from the world by the regime without electricity, communications or water," said Hadi Abdullah, contacted in the city of Homs.
An officer in the rebel Free Syrian Army said diplomatic initiatives had proved fruitless in the past. "When they fail no action is taken against the regime and that's why the opposition has to arm itself against its executioner," he added.
For full article: http://www.reuters.com/article/2012/03/08/us-syria-idUSTRE8220CI20120308