In a keynote speech to Israeli students, US President Barack Obama said on Thursday that continued settlement activity was "counterproductive" to peace, adding that the Palestinians had a right to self-determination.
But he also insisted that now was the time for the Arab world to start normalizing relations with the Jewish state.
"Israelis must recognize that continued settlement activity is counterproductive to the cause of peace, and that an independent Palestine must be viable, that real borders will have to be drawn," Obama said in a nationally televised speech.
Obama, coupling his push for a more conciliatory Israeli approach to the Palestinians with a reaffirmation of his commitment to Israel's security, also promised that Washington will "do what me must to prevent a nuclear-armed Iran".
"Easiest thing for me to do would be to put the peace issue aside," Obama said.
"Peace is necessary, peace is the only path to true security."
Obama added, the only way for Israel to survive as a Jewish and democratic state is through the creation of an independent and viable Palestinian state.