It is the first time Obama and the Dalai Lama appeared in public together. The National Prayer Breakfast is an annual event that brings together Democrats, Republicans and various religious leaders, mostly Christian.
Obama said the Dalai Lama is "a powerful example of what it means to practice compassion and who inspires us to speak up for the freedom and dignity of all human beings."
Dr. Kent Brantly, who survived a struggle with Ebola, delivered a prayer at the event.
The Chinese government objected to the meeting of the Dalai Lama, who it considers a dissident and dangerous separatist. Obama and the Tibetan leader did not meet directly, but rather acknowledged each other from a distance.
White House Senior Adviser Valerie Jarrett sat with the Dalai Lama.
"We see faith driving us to do right," Obama said. "But we also see faith being twisted and distorted, being used as a wedge - or worse, sometimes used as a weapon."
Obama condemned the the Islamic State, calling it a "brutal, vicious death cult."
Obama said that throughout history, religion has been abused to do wrong -- citing the historical events of the Crusades, the Inquisition and of American slavery.
"No God condones terror," he said. "No grievance justifies the taking of innocent lives or the oppression of those who are weaker or fewer in number."