Video: President Obama arrived in the West Bank Thursday, where he was greeted by Palestinian Authority President Mahmoud Abbas.
Polls and interviews show Israelis perceive President Obama as cool toward and tough on a longtime ally.
Obama said he believes it is "still possible" to achieve a peace deal that establishes an independent Palestinian state and gives Israel security, but he conceded that it would be "very difficult."
Obama made the comments after arriving here Thursday to a ceremonial welcome and a disenchanted Palestinian leadership, whom he sought to convince that he is serious about pushing for new peace negotiations with Israel early in his second term.
"The Palestinian people deserve an end to occupation and the daily indignities that come with it," Obama said at the news conference with Abbas. He said the two discussed the issues of Israeli settlement activity, Palestinian prisoners and access to Muslim holy sites in Jerusalem.
Obama acknowledged that "the situation on the ground continues to evolve in a direction that makes it harder to achieve a two-state solution." But he added: "We cannot give up on the search for peace no matter how hard it is."
He said both sides must be "willing to break out of the old habits, the old arguments, to reach that new place, that new world."
"If we can get direct negotiations started again, I believe that the shape of a potential deal is there," Obama said. "And if both sides can make that leap together, then not only do I believe that the Israeli people and the Palestinian people would ultimately support it with huge numbers, but I also think the world and the region would cheer."
He said he made it clear in talks with Israeli Prime Minister Benjamin Netanyahu and other Israeli leaders that the United States opposes continued settlement activity in the West Bank, a position taken by previous U.S. administrations.
"We do not consider continued settlement activity to be constructive, to be appropriate, to be something that can advance the cause of peace," he said. But he said that if the Palestinians insist that "we can only have direct negotiations when everything is settled ahead of time, then there's no point for negotiations."
He said the fundamental issue is how to structure a Palestinian state that is sovereign, viable and contiguous while giving Israel confidence about its security. "If we solve those two problems, the settlement problem will be solved," he said.
Obama's language about settlements appeared to be softer than in 2009, when he said he could not accept the "legitimacy" of Israeli settlements and called for a freeze.
Abbas said in opening remarks at the news conference that his talks with Obama focused on "the disastrous risk of settlements on the two-state solution" and on the need to release Palestinian prisoners held by Israel.
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