"The Israeli government expresses its hope that President Obama's important speech in Cairo will in fact lead to a new kind of reconciliation between the Arab and Muslim world and Israel," Prime Minister Benjamin Netanyahu's office said.

"We share President Obama's hope that the American effort will herald in a new age that will bring an end to the conflict and pan-Arab recognition of Israel as the state of the Jewish people living in peace and security in the Middle East.

Israel will work toward peace "while taking into consideration its national interest, first and foremost its security."

While calling the bond between Israel and the United States "unbreakable" and slamming anti-Semitism and Holocaust denial, Obama reiterated his support for a sovereign Palestine. He called the Palestinian situation "intolerable" and said continued Jewish settlements in the West Bank had no legitimacy.

This marked the latest in a string of blunt comments from the Obama administration toward Israel, which have raised tensions between the two to levels unseen in 20 years.

The Palestinian Authority hailed Obama's speech as "clear and frank."

"It is an innovative political step and a good beginning on which one must build," said Nabil Abu Rudeina, spokesman for Palestinian president Mahmud Abbas.

The speech broke with the "preceeding partial American policy" in favour of Israel, he said. "The comments on the intolerable Palestinian situation is a message that Israel should understand well."

The Hamas movement ruling the Gaza Strip -- which Obama called on to renounce violence, recognise Israel and past peace agreements if it wanted to play a role in fulfilling Palestinian aspirations -- cautiously greeted the speech, but said it contained "contradictions."

"Hamas greets the measured tone used by President Obama, exempt of the menacing language that the previous administration has gotten us used to," Hamas spokesman Fawzi Barhum said in a statement.

"This address must be judged not on its form, but by the policies that Obama will apply on the ground to respect the freedom of people and their democratic choices and the right of the Palestinian people to its land," he said.

"It had many contradictions, all the while reflecting tangible change," Barhum told AFP.

Israeli settlers, who once again heard the new US administration call for a stop to te Jewish settlements in the occupied West Bank, slammed the address.

"He expressed positions that are contrary to our interests and the will of the voters of Israel," Danny Dayan told public radio, referring to the February 10 election that saw right-wing parties take a majority of seats in parliament.

"He wants to dictate the fate of Jerusalem and of the Temple Mount and we cannot tolerate this," he said, referring to the area in Jerusalem's Old City that Muslims know as the Noble Sanctuary, which is the holiest site in Judaism and third-holiest in Islam.

In Gaza, residents cautiously welcomed the speeck. The territory is reeling from an Israeli blockade that has prevented all but essential humanitarian goods from entering since Hamas, a group pledged to Israel's destruction, seized power in June 2007.

"It is a balanced speech and all I hope is that it will translate into action," said Khadher Affana, 50, a doctor.

"There is a change and there is a message that speaks of the suffering of the Palestinians. We hope that Israel will understand this message and will do what he asked."

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