'Naivety can be dangerous'
Obama devoted a large portion of his speech to the issue of Israel and the Palestinian, and it comes amid reports of deepening differences between the US and Israel on the expansion of settlements.
The US president restated Washington's strong ties with Israel, calling on Muslims to recognise the Holocaust.
But Obama also used the term "Palestine", as he reiterated his call for a Palestinian state.
Danny Seaman, the director of Israel's Government Press Office, said the government backed Obama's message.
"All in all, it's not bad. I don't think there's anything we disagree with here," he said.
"The state of Israel isn't against reconciliation," he added, but warned against any moves that could "be used by the extremists to endanger Israel and endanger the peace process".
But Aliza Herbst, a 56-year-old resident of the West Bank settlement of Ofra, said Obama's "naivety can be dangerous".
"You can have your speechwriters find every good thing a Muslim has ever done. But more modern history is that the Muslim world is at war with the Western world," she told the Associated Press news agency.