Rice, on a two-day visit to the world's most populous Muslim nation, tried to counter strong criticism among many in Indonesia and elsewhere over the US invasion of Iraq and its actions in fighting terrorism.
"I understand that the United States has had to do things in the world that are not that popular in much of the world. We are fighting a very tough enemy, an enemy that has been felt here in Indonesia with bombings in Bali and Jakarta," said Rice on Tuesday.
Speaking at a news conference with Hassan Wirajuda, the Indonesian Foreign Minister, Rice complained that many in the region misunderstood her country, which she said had a great respect for people of the Islamic faith.
Indonesia has seen large anti-US protests over the past few weeks and before Rice began her official meetings.
About 400 slogan-shouting Muslim protesters gathered outside the heavily-guarded US embassy to protest against her visit, saying she was a "vampire from America".
As 300 policemen looked on with two water cannons on standby, one speaker told the protesters: "Our welcome speech will say, 'Condoleezza Rice go to hell'. Because wherever she goes, the US targets the place not to solve problems but to create problems."
Protesters against Rice's visit,
said the US created problems
Rice praised Indonesia's moderate policies and its co-operation in fighting against terrorism, which were rewarded last November with the restoration of military ties between the two countries, a move human rights groups say was premature.
She said she hoped Jakarta could deliver an important message to the rest of the Muslim world.
"I think Indonesia has a very big role to play as an example of what moderation, tolerance and inclusiveness of society can be," said Rice.
Wirajuda also hailed improved bilateral relations and thanked the United States for its support of peace efforts in Indonesia's troubled region of Aceh.
Rice also met Susilo Bambang
"I understand that there are still issues that perhaps we cannot totally agree upon. However, we agreed to continue dialogue and this constitutes an important aspect of our commitment to democratic ideals," said Wirajuda, without elaborating what these differences were.
Since the 11 September 2001 attacks in New York and Washington, Indonesia has become a firm US ally in fighting terrorism, and democratic reforms have improved bilateral ties.
The end of autocratic President Suharto's 32-year rule in 1998 allowed democracy to flourish in Indonesia and encouraged better US relations.
Susilo Bambang Yudhoyono, a former general with US training, became Indonesia's first directly elected president in 2004 on a strong security platform.
Rice met Susilo after the news conference.
Presidential spokesman Dino Djalal said their one-hour discussion covered bilateral issues such as the need to increase co-operation in the fight against avian flu and further improving their relationship after the resumption of military ties.
Some human rights groups say progress in reforming Indonesia's military and police has been too slow and that the United States has not paid enough attention to abuses committed by the military, losing important leverage to push for change.
Middle East influence
But the United States sees Indonesia as a voice of moderation in the Islamic world, and Rice hopes it might have some influence in the Middle East, particularly over Hamas, which won Palestinian elections in January.
Djalal said Susilo repeated Indonesia's support for a Palestine state that would co-exist with Israel and said: "Indonesia appreciated the election process in Palestine, which was won by Hamas."
The US embassy is heavily
guarded during Rice's visit
Asked about Jakarta's demand for direct access to Indonesian militant Hambali, who has been held by the Americans since 2003, Rice said the two sides were sharing information and would continue co-operating in this case.
Hambali is suspected to be the mastermind behind the bombings on Indonesia's holiday island of Bali in 2002 in which more than 200 people were killed.
Rice's first appointment was a visit to one of Jakarta's oldest Islamic schools, where she was welcomed by children waving Indonesian and US flags and students in traditional white headscarves playing hand-held drums.
Rice prayed with the children, took part in a science experiment and announced an $8.5 million grant for an educational Sesame Street programme.
Rice will leave Indonesia on Wednesday for Australia, arguably its closest friend in the region.