Iraq war 'difficult'
"The war in Iraq has been difficult and trying for our nation, but it is in the interests of our nation that we succeed," Bush said.
He also welcomed the formation of the "Awakening Councils," groups of Iraqis who have sided with the US to confront al-Qaeda in Iraq.
"Al-Qaeda is on the run in Iraq and this enemy will be defeated,'' he said.
The US president also stepped up his rhetoric against Iran, warning Tehran it should "come clean" on its nuclear ambitions, saying the US will confront "any threats" against its forces.
"America will confront those who threaten our troops, we will stand by our allies, and we will defend our vital interests in the Persian Gulf," Bush said.
His comments come less than a month after the Pentagon claimed that Iranian speed boats "aggressively" approached US Navy patrols in the strategic Strait of Hormuz.
"He made no mention of the [US National Intelligence Estimate] report that said Iran was not making nuclear weapons," Rob Reynolds, Al Jazeera's correspondent in Washington, said.
"Bush glossed over the resurgence of the Taliban and touched only briefly on the Israeli-Palestinian conflict voicing hope for a peace deal to be worked out this year," he said.
"He made no mention of the chaos that has wracked Gaza and spilled over into Egypt in recent weeks."
Marwan Bishara, Al Jazeera's senior political analyst, said the speech offered little that was new in terms of policy.
"In many ways Bush returned to the same themes, addressing them in the same old way, as if nothing had happened over the last six years."
Democrats criticised Bush's speech, with presidential candidates Barack Obama and Hillary Clinton dismissing his "empty rhetoric" and "failed policies."
Dennis Kucinich, the Democratic senator for Ohio who recently withdrew from the race for the presidential nomination, said he was "troubled" by foreign policy aspects of the speech.
"He seems to want to continue the war in Iraq and ramp-up for a war in Iran."
"The president continues to misread the Middle East and this is a great problem for peace."
Bush also sought to address global fears of a looming US recession.
He acknowledged growth was slowing and there was "concern" over the US economy, but said that "in the long run, Americans can be confident about our economic growth".
Human rights row
He urged congress to pass his $150bn economic stimulus plan "as soon as possible".
To loud applause, the US leader also urged legislators to pass a bill making tax cuts permanent and urged congress to pass free-trade deals with Colombia, Panama and South Korea.
Democrats have opposed the deal with Colombia over its record on human rights and trade union organisation.
Bush's seventh State of the Union speech was a chance to set the tone for his final months in office and try to salvage his legacy before he leaves office in January 2009.
But Al Jazeera's Rob Reynolds said that was not clear if people were listening to his message in the midst of heated campaign for the Democratic and Republican presidential nominations.
"Bush's approval rating is lower than ever and the country's attention is firmly fixed on the presidential campaign. America, it seems, is looking beyond Bush and looking forward to the end of his era."