'Cessation of settlements'
But he also insisted that Israel must meet its "road map" obligations to halt the construction of settlements in the occupied West Bank and the Palestinians must put an end to violence against Israel.
"Both sides are going to have to move in some politically difficult ways in order to achieve what is going to be in the long term interests of the Israelis and the Palestinians.
"On the Israeli side that means a cessation of settlements."
"There is a tendency to try to parse exactly what this means - but I think the parties on the ground understand that if you have a continuation of settlements that in past agreements have been categorised as illegal, that is going to be an impediment to progress."
Netanyahu gave some ground after weeks of pressure from Obama over the issue of Palestinian statehood, endorsing the establishment of a so-called state and laying down several conditions, including that it have no military and that it recognise Israel as a Jewish state.
Palestinians have rejected those demands, saying Netanyahu's speech "closed the door to permanent status negotiations".
"We ask the world not to be fooled by his use of the term Palestinian state because he qualified it. He declared Jerusalem the capital of Israel, said refugees would not be negotiated and that settlements would remain," Saeb Erekat, the Palestinians' senior negotiator, said.
Netanyahu equivocated on the issue of settlements, saying Israel had "no intention of building new settlements or of expropriating additional land for existing settlements" but that "there is a need to enable the residents to live normal lives, to allow mothers and fathers to raise their children like families elsewhere", in defence of what Israel calls "natural growth".
Netanyahu's speech came a week after Obama addressed the Muslim world from Egypt and strongly reiterated US backing for independent Israeli and Palestinian states living side by side in peace.
Obama, who has been pressing for peace talks to resume, made his brief comments on Netanyahu's speech at the end of a meeting with Silvio Berlusconi, Italy's prime minister, at the White House on Monday.