"If those conditions are met, I think we can envision an arrangement where Palestinians and Israelis live side-by-side."
Obama urged Netanyahu to capitalise on what he called "an historic opportunity" to restart serious negotiations with the Palestinians, but also reiterated his commitment to Palestinian statehood.
"It is of interest not only to the Palestinians but also to the Israelis and the international community to achieve a two-state solution in which Israelis and Palestinians are living side-by-side in peace and security," he said.
Nabil Abu Rdainah, a senior aide to Mahmoud Abbas, the Palestinian president, said Obama's commitment to a two-state solution was "encouraging", while Netanyahu's failure to commit to the same was "disappointing".
Al Jazeera's Jacky Rowland, reporting from Jerusalem, said the issue of a Palestinian state would remain a sensitive one.
"Obviously the question of the two-state solution and any overt commitment from Netanyahu is very sensitive because this is something that the Obama administration has been very keen to press."
Dore Gold, a former Israeli ambassador to the UN, told Al Jazeera that Israel had "certain issues" with the idea of Palestinian statehood.
"Explicit in the concept of statehood are certain powers ... like the right to make defence treaties with any countries you want," he said.
"We could not have a Palestinian self-government which could sign a defence treaty with Iran and deploy the Revolutionary Guards in the hills overlooking Ben Gurion airport.
"Rather than say we agree to a state right now, and then during the course of negotiations subtract those powers from Palestinian self-government, we are saying up front that we have certain issues."
Obama also urged Israel on Monday to halt the expansion of Jewish settlements in the occupied West Bank.
Israel has a clear obligation to stop building settlements under the road map for peace agreed in 2003, he said.
|The US has called on Israel to halt settlement activity in the occupied West Bank
"We have to make progress on settlements. Settlements have to be stopped."
His call came after reports that Israel was moving ahead with construction of a new settlement on the east side of the West Bank, where Israeli officials have already issued tenders for housing units in the area.
David Elhaiini, a local Israeli government official, said the timing of the construction was not intended to make a political point as it was initially approved in 2008 by Ehud Barak, the Israeli defence minister, the Associated Press news agency reported.
Al Jazeera's Nour Odeh, reporting from Ramallah, said Palestinians believe Obama's comments on the settlement activity should accompany political action.
"Many say that so long as Barack Obama's words are not matched by real policy change, by actions taken towards this Israeli policy, then nothing will change on the ground."
"It's very hard to sell an argument that settlement construction should stop without really matching that with real political pressure with consequences, political and financial."
Netanyahu and Obama also discussed the issue of Iran's controversial nuclear programme during their talks.
Netanyahu said Israel reserved the right to defend itself against Iran.
"Iran openly calls for our destruction, which is unacceptable. It threatens US interests worldwide. The worst danger we face is that Iran would develop nuclear military capabilities," he said.
The Israeli leader said he welcomed US diplomatic efforts to work with Iran, but "what is important is the commitment to the result that Iran does not develop nuclear capability".
In his remarks on the issue, Obama said he expects a positive response from his country's diplomatic efforts to engage Iran.
But he also warned that the US would not hold talks "forever" in an effort to stop Iran's nuclear weapons programme.
Israel and Western nations remain concerned that Tehran's uranium enrichment programme is geared towards the building of a nuclear warhead, but Tehran says it is aimed at meeting civilian energy needs.