US President Barack Obama warned Thursday that Israel was at a "crossroads" and should choose peace with Palestinians because it was necessary for its own ultimate security and was morally just.

Obama argued that though the Palestinian issue had receeded as Israelis felt safer in their own homes, it was necessary to solve the decades-old dispute so the Jewish state could fulfil its destiny.

"Today, Israel is at a crossroads," Obama said in a major speech, adding that although Israelis felt safer under Iron Dome missile defences and barriers to thwart suicide bombers, "peace is the only path to true security."

Obama made his most explicit case yet for Israelis to re-engage in peace talks which foundered two-and-a-half years ago in the speech at a Jerusalem convention centre that formed the centrepiece of his three-day visit to Israel.

The president said he realised that many Israelis did not share his views and that many observers were sceptical at the prospect of another US-sponsored peace drive, but said: "I want you to know that I speak to you as a friend who is deeply concerned and committed to your future.

"First, peace is necessary. Indeed, it is the only path to true security," Obama said, hours after returning from a five-hour visit to see Palestinian leaders in the West Bank.

"Second, peace is just," Obama said, again seeking to show he understood the reticence of Israelis who believed Palestinian leaders had missed "historic opportunities."

Finally, he concluded: "Peace is possible," but acknowledged "there will always be a reason to avoid risk and there's a cost for failure.

"Negotiations will be necessary, but there is little secret about where they must lead -- two states for two peoples.

"There will be many voices that say this change is not possible," Obama said in the speech, which was in some ways a bookend to his historic 2009 address to the Muslim world in Cairo.

"But remember this: Israel is the most powerful country in this region. Israel has the unshakeable support of the most powerful country in the world."

Obama also used the speech to seek to bolster a sense of security among Israelis, and to touch on regional turmoil raging around the Jewish state.

He demanded that foreign governments blacklist Hezbollah as a "terrorist organisation," slamming the Shiite Lebanese militia for attacks on Israelis.

"Every country that values justice should call Hezbollah what it truly is -- a terrorist organisation," Obama said, in remarks aimed at the European Union which has declined to put the group on a blacklist of terrorist movements.

Obama also issued a new call for Syrian President Bashar al-Assad to leave power amid a bloody uprising that has claimed 100,000 lives.

"America will also insist that the Syrian people have the right to be freed from the grip of a dictator who would rather kill his own people than relinquish power," he said.

Obama has angered critics who say his rhetoric is not enough on Syria and dispute his insistence that arming rebels battling Assad could make the problem even worse.

The US leader issued a fresh warning to Iran, saying a nuclear-armed Islamic Republic would be a danger to the entire world, as he sought to convince Israelis he takes seriously Tehran's threat to the Jewish state.

Obama said he favoured a diplomatic resolution to the nuclear dispute but warned Iran's time was not unlimited: "I have made the position of the United States of America clear: Iran must not get a nuclear weapon. This is not a danger that can be contained."