President Obama on Monday embarked on his most daunting diplomatic challenge yet by telling Israel to take "difficult steps” towards peace, allow a Palestinian state and halt settlement expansion on occupied land.

His talks with Binyamin Netanyahu, Israel’s hardline Prime Minister, marked the start of an intensive focus on the Middle East. Mr Obama hopes to re-start a peace process that has stalled under a succession of US presidents.

After more than two hours of discussions at the White House Mr Obama said that it was in the interests of every country, including the US, to "achieve a two-state solution in which Israelis and Palestinians are living side by side in peace and security”.

He added: "I suggested to the Prime Minister that he has an historic opportunity to get a serious movement on this issue during his tenure. That means that all the parties involved have to take seriously obligations that they have previously agreed to.”

Such obligations, he said, had been "outlined in the road map” agreed with the US in 2003 and meant that building work by Jewish settlers on Palestinian land must cease. "We have to make progress on settlements,” Mr Obama said.

"Settlements have to be stopped.”

Mr Netanyahu has so far refused to endorse full Palestinian statehood. He has suggested that settlements needed to be allowed to grow naturally, insisting that the priority should be to deal with the "existential threat” to Israel posed by a nuclear Iran.

At the White House he again pointedly sidestepped the issue of Palestinian sovereignty, indicating that he favoured a more limited form of self-government for Palestinians.

While promising to resume peace talks immediately he said that any deal depended on the acceptance across the Arab world of Israel’s right to exist.

At their joint press appearance Mr Netanyahu had little to say about Palestinians but a great deal about Tehran’s nuclear ambitions: "We want to move simultaneously and in parallel on two fronts: the front of peace and the front of preventing Iran from acquiring nuclear capability.”

Mr Obama, having admitted in March that Mr Netanyahu’s return to power did not make peacemaking any easier, knows that the Prime Minister has since been rattled by signs that he may adopt a tougher approach towards Israel — while softening his policy on Iran.

Two weeks ago CIA director Leon Panetta is said to have met Mr Netanyahu in Jerusalem where he was told Israel was only willing to wait around a year for the US policy of re-engaging Iran to work.

There have been regular hints that Israel might consider a military airstrike to stop Tehran getting nuclear capability. At his meeting with Mr Netanyahu Mr Obama offered Israel reassurance that there was "deepening concern” about Iran and he was keeping open a "range of steps, including much stronger international sanctions” if Tehran fails to respond.

While refusing to set an artificial deadline for any negotiations with Iran about ceasing uranium enrichment, he said: "We’re not going to have talks forever . . . We should have a fairly good sense by the end of the year as to whether they are moving in the right direction.”

The White House talks had been billed as a confrontation between two sharply conflicting approaches to resolving the 60-year conflict between Israel and Palestinians. Mr Netanyahu — a sometimes abrasive figure who on his first visit to the White House in 1996 so infuriated Mr Clinton that the then President vented a stream of profanities once his guest had left — poured on the charm yesterday, praising Mr Obama as a "great leader for America, a great leader for the world and a great friend of Israel”.

For his part Mr Obama expressed confidence that Mr Netanyahu "is going to rise to the occasion”.

The White House emphasised that the meeting should be seen merely as the first stage of what will inevitably be a long and uphill journey towards a lasting settlement.

Next week he will hold White House talks with President Mubarak of Egypt, and Mahmoud Abbas, the head of the Palestinian Authority, as he prepares to unveil his peace initiative, possibly in a speech to the Muslim world, on June 4.

After their meeting in the White House Mr Netanyahu told a select group of journalists that he had deliberately ducked the vexed issue of Palestinian statehood.

"I did not say two states for two peoples,” he said.

"We need to deliberate to clarify this. Does it mean a Hamas state? I hope not. So how do I ensure it’s not a Hamas state, an entity that threatens Israel security? I think that’s a fundamental question,” Mr Netanyahu said.

On the President’s plate  Middle East

Obama holds talks with President Mubarak of Egypt on May 26 and Mahmoud Abbas, the Palestinian President, on May 28. On June 4 Obama addresses the Muslim world from Egypt. He then goes to France and Germany for 65th anniversary of the Normandy landings

Domestic legislation

Reform Bills on healthcare and climate change reach Congress next month. Democrats have majorities in both Houses but the measures will be opposed by fiscal conservatives as Capitol Hill tries to reconcile different versions of a $3.6 trillion Budget, while dividing over Bush-era interrogation techniques

Supreme Court

A battle may be looming over the nomination to replace Justice David Souter. Will it be a woman? An advocate of same-sex marriage? The choice threatens to drag Obama back into the "culture wars” — something that he would prefer to avoid

Peace and prosperity — or war and poverty?

Obama goes to Russia on July 6-8 for talks with President Medvedev on nuclear disarmament, missile defence and Iran. He goes to Italy on July 8-10 for the first G8 summit since the world economy imploded, before a visit to Ghana.

The surge of 21,000 US troops into Afghanistan continues through the summer in the run-up to August 20 elections there. Stimulus spending needs to start showing results at home before the year’s end.

The Times