"Our message is clear," said the US president. "If North Korea is prepared to talk concrete and irreversible steps to fulfil its obligations and eliminate its nuclear weapons programme, the United States will support economic assistance and help promote its full integration into the international community.
"That opportunity and respect will not come with threats. North Korea must live up to its obligations."
Lee, standing beside Obama at a news conference after their meeting in Seoul, said North Korea could hope for massive economic aid if it renounced its nuclear arms programme.
"I hope that by accepting our proposal, the North will secure safety for itself, improve the quality of life for its people, and open the path to a new future," he said.
North Korea rattled regional security just ahead of Obama's first visit to Seoul since taking office by sparking a naval fight with the South and declaring early this month that it had produced a fresh batch of weapons-grade plutonium.
Envoy to visit North
Announcing that he was sending Stephen Bosworth to Pyongyang on December 8 for talks, Obama said the door was open for resolving the nuclear standoff but Washington was determined not to be distracted by "side issues" thrown up by North Korea.
Obama flies home later on Thursday after probably the smoothest leg of his week-long Asia trip that included China, where he appeared to barely bridge differences on trade, currency policy and human rights.
Thousands of cheering South Koreans lined the streets of downtown Seoul as Obama's motorcade drove by, unlike in China where there was little public expression of popular excitement over his visit.
The thorniest issue between Washington and Seoul is their free trade agreement, which analysts say could increase their annual two-way trade by about $20bn from the current $83bn.
Obama said there were still issues to be ironed out but agreed with Lee to push for progress on approving the bilateral trade deal that has yet to be ratified by either country's legislatures two years after it was signed.
"President Obama and I once again confirmed the economic and strategic importance of the free trade agreement between our countries and agreed to work on its progress," Lee said.
Seoul says it will not renegotiate the deal but Lee said he was willing to reopen discussions on this vehicles sector - a sticking point in US congress ratification - to get it moving.
"If automobiles are a problem, we are in a position to discuss them again," he said.