Pietersen has been left out of England's World Twenty20 squad, continuing his isolation over "provocative" text messages, allegedly criticising England captain Andrew Strauss, to players from his native South Africa.
He was dropped from the England team that lost the third Test against South Africa at Lord's by 51 runs on Monday over the allegations, and was also left out of the forthcoming one-day and Twenty20 squads for matches against the Proteas.
Warne said Pietersen, a long-time friend, would be "one of the first people to admit that he's acted in a way that's been a bit silly and stupid and I'm sure he'd like to take back a few of his actions."
But he defended the South African-born batsman, saying "both sides are at fault -- the bottom line is Kevin Pietersen is not playing international cricket, which is a tragedy."
"There's a bit too much ego at the ECB (England and Wales Cricket Board), there's no give or take or compromise," Warne said in a press conference in Sydney before Pietersen's omission from the World Twenty20 side.
"The (English) cricket team, I think they've let Kevin Pietersen down -- it shouldn't have gotten to this stage," he added.
"If he doesn't sign his England contract, if he doesn't play for England again, I just think that's a tragedy."
Warne said the "leadership of England, whether it be the selectors, ECB, coaching, captain, all that -- they have to put their hands up and say 'we haven't handled this as best we can'."
"Kevin Pietersen has to put his hand up and say 'I've conducted myself in a pretty ordinary fashion, too'."
Warne said Strauss and Pietersen should have sorted out their differences privately, even if that involved them "punch(ing) the absolute whatever out of each other."
"Do it, get it out of your system then come back, put your arm around each other and walk out to play together," said Warne.
For Warne, Kevin Pietersen's exit is 'tragic'
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