In a keenly awaited address to the Muslim world at Cairo University, Obama also called on Palestinians to renounce violence, saying that armed resistance was not only wrong but also counterproductive.

His comments drew praise from moderate Palestinian president Mahmud Abbas but a sceptical response from the Islamist Hamas movement which controls Gaza.

Israel said it hoped the speech would help bring about reconciliation with the Muslim world but stressed that national security remained its top priority.

Obama, who has made Middle East peace a key foreign policy priority, vowed that the United States would not turn its back on the "legitimate" Palestinian aspiration for a state, saying two states are the "only resolution."

"Let there be no doubt: the situation for the Palestinian people is intolerable," Obama said, speaking on his first major visit to the Middle East where he held talks with the Egyptian and Saudi Arabian leaders on the peace process.

"America will not turn our backs on the legitimate Palestinian aspiration for dignity, opportunity and a state of their own," he added.

Abbas spokesman Nabil Abu Rudeina hailed what he called a "an innovative political step and a good beginning on which one must build."

The Israeli government gave a guarded welcome to Obama's comments.

"Israel is committed to peace and will assist with all its ability to expand the circle of peace while taking into consideration its national interest, first and foremost its security," it said.

Obama, who has taken a much tougher stance with Israel than his predecessor George W. Bush, also pointed to the suffering of the Jews over the centuries and said denial of the Holocaust was "baseless, ignorant and hateful."

"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 the people of this region deserve."

And speaking of the peaceful campaign for civil rights carried out by blacks in his own country, he said: "Palestinians must abandon violence. Resistance through violence and killing is wrong and does not succeed.

Hamas -- which has controlled Gaza since seizing control of the territory in a week of deadly streetfighting in June 2007 -- "does have support among some Palestinians," Obama said, but "they also have responsibilities."

"To play a role in fulfilling Palestinian aspirations, and to unify the Palestinian people, Hamas must put an end to violence, recognise past agreements and recognise Israel's right to exist," he said.

Hamas spokesman Fawzi Barhum said the US president's comments had "many contradictions, all the while reflecting tangible change".

"It is a speech that plays on sentiment and is filled with civilities, which leads us to believe that he aimed to embellish America's image in the world," Barhum said.

Obama said that Israel, whose government has declined to sign up explicitly to the goal of a Palestinian state, needed to accept Palestinian statehood.

"Israelis must acknowledge that, just as Israel's right to exist cannot be denied, neither can Palestine's," he said"

"The United States does not accept the legitimacy of continued Israeli settlements," which he said violate previous agreements, undermine peace efforts and "must stop."

He also said Israel must meet its obligations to "ensure that Palestinians can live, and work, and develop their society," saying the continuing humanitarian crisis in the Gaza Strip and lack of opportunity in the West Bank do not serve Israel's security.

Peace talks between Israel and the Palestinians were revived amid great fanfare in November 2007 but they have yet to make any tangible progress and have stalled since Israel's devastating offensive against the Gaza Strip at the turn of the year.

earlier related report
Israel hopes for Arab reconciliation after Obama speech
Israel said it hoped for reconciliation with the Arab and Muslim world but that its security was key in any peace drive in the wake of US President Barack Obama's landmark speech, which the Palestinians hailed as a good beginning.

"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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