"American will align our policies with those who pursue peace, and say in public what we say in private to Israelis and Palestinians and Arabs," Obama said in a speech delivered at Cairo University. "We cannot impose peace."
The Jewish people were persecuted for centuries, culminating the Holocaust, Obama said.
"Threatening Israel with destruction -- or repeating vile stereotypes about Jews -- is deeply wrong, and only serves to evoke in the minds of Israelis this most painful of memories while preventing the peace that the people of this region deserve," the president told the crowd of 3,000.
However, "it is also undeniable that the Palestinian people -- Muslims and Christians -- have suffered in pursuit of a homeland," he said.
"For decades, there has been a stalemate: two peoples with legitimate aspirations, each with a painful history that makes compromise elusive," Obama said.
A two-state solution "is in Israel's interests, Palestine's interests, America's interests, and the world's interest," Obama said, pledging patience to pursue such an outcome. "For peace to come, it is time for them -- and all of us -- to live up to our responsibilities."
Palestinians must abandon violence, honor past agreements and recognize Israel's right to exist, Obama said, and Israel must recognize "Palestine's right to exist."
He restated U.S. opposition to Israeli settlements in the West Bank, saying, "This construction violates previous agreements and undermines efforts to achieve peace. It is time for these settlements to stop."
Arab states must recognize that the Arab Peace Initiative was an important beginning, but not the end of their responsibilities, Obama said.
"All of us have a responsibility to work for the day when the mothers of Israelis and Palestinians can see their children grow up without fear," Obama said, "when Jerusalem is a secure and lasting home for Jews and Christians and Muslims."