Obama, in a speech to the U.N. General Assembly, urged fellow world leaders to press forward with renewed determination in the quest for Mideast peace, an effort that he acknowledged has encountered "few peaks and many valleys."
Without an agreement, he said, "more blood will be shed" and "this Holy Land will remain a symbol of our differences, instead of our common humanity."
As Obama spoke, Israel's seat in the hall sat empty because it was a Jewish holiday. Palestinian President Mahmoud Abbas was present, listening to the president through a translator's earphone. Obama's call for a Palestinian state drew a burst of applause from throughout the hall.
Obama's one-year timeline is ambitious even if the Mideast peace process faced the best of circumstances, which it does not. He made no mention of the militant Hamas movement, which controls the Gaza Strip and refuses to accept Israel's right to exist.
The failure of past peace efforts has left both sides with rigid demands and public ambivalence about the value of a negotiated settlement.
Obama spoke with resolve of the need to address trouble spots around the world, but he tended first to the economic concerns that abound both at home and abroad.
"There is much to show for our efforts," he said, recalling the economic turmoil of years past. "We cannot - and will not - rest until these seeds of progress grow into a broader prosperity for all Americans and for people around the globe."
On a pressing security issue, Obama defended his administration's approach to engaging Iran in negotiations over its nuclear program - an effort that has failed thus far. In July the administration imposed a new set of sanctions on Iran.
"The door remains open to diplomacy should Iran choose to walk through it," he said. "But the Iranian government must demonstrate a clear and credible commitment and confirm to the world the peaceful intent of its nuclear program."
Iran recently has indicated interest in restarting talks with the West, and on Wednesday the five permanent members of the U.N. Security Council and Germany offered Iran another chance to enter negotiations. Iranian state TV quoted Foreign Minister Manouchehr Mottaki, who was in New York, as saying that Iran is ready to resume the talks but the negotiations must be fair.
Obama also spoke to the promotion of human rights, open government and democracy - familiar themes from a president who has pushed for international cooperation against repression and tyranny.
"Make no mistake: The ultimate success of democracy in the world won't come because the United States dictates it. It will come because individual citizens demand a say in how they are governed," he said. "There is no soil where this cannot take root."
Obama drew applause in mentioning U.N. efforts to protect the rights of women, and he urged all nations to act against oppression.
"Do not stand idly by, don't be silent when dissidents everywhere are imprisoned and protesters are beaten," he said.
The president devoted his greatest attention to the Israeli-Palestinian conflict, underscoring the urgency of overcoming the hurdles that he has met less than a month after relaunching direct negotiations between the parties.
Abbas is threatening to walk out of the talks if Israel does not extend a slowdown on construction of Jewish settlements in the West Bank that is set to expire next week. Israeli Prime Minister Benjamin Netanyahu has said he will not extend that partial freeze.
The looming expiration appears to have stalled the negotiations, which got under way in early September in Washington between Abbas and Netanyahu and then moved to a second round in Egypt and in Jerusalem last week. That second round ended inconclusively with little visible progress and without the expected announcement of a third session.
Obama underscored the administration's position that the settlement moratorium should be extended, saying it "has made a difference on the ground, and improved the atmosphere for talks."
Secretary of State Hillary Rodham Clinton and the administration's special Middle East peace envoy George Mitchell have been meeting with officials from both sides and other interested parties this week in New York but seem to have made little headway.
Faced with the real possibility of the collapse of negotiations, Obama implored the international community to get behind the idea of peace and forget favoritism to one side or the other.
"Those of us who are friends of Israel must understand that true security for the Jewish state requires an independent Palestine," he said. "And those of us who are friends of the Palestinians must understand that the rights of the Palestinian people will be won only through peaceful means - including genuine reconciliation with a secure Israel."
Obama urged the U.N. in its 60th year to look beyond past Middle East peace failures and get on with the task at hand.
"We can come back here, next year, as we have for the last 60, and make long speeches about it," he said. "We can read familiar lists of grievances. We can table the same resolutions. We can further empower the forces of rejectionism and hate."
"Or we can say that this time will be different, that this time we will not let terror or turbulence or posturing or petty politics stand in the way."
Obama's speech came amid a three-day U.N.-dominated trip to New York, where the president was meeting privately with the leaders of China, Japan, Colombia, Azerbaijan and Kyrgyzstan. In addition, he was to host Southeast Asian leaders and attend a meeting aimed at preventing renewed civil war in Sudan.
At his meeting with Chinese Premier Wen Jiabao, Obama praised China's leaders for "openness and cooperation" on issues including the economy, nuclear nonproliferation and regional security. But he said that more cooperation and "frank discussions" will be needed to achieve sustained economic growth. The meeting played out at a time when the two powers have been quarreling over military, trade and diplomatic matters.
Wen, for his part, said the two countries' "common interests far outweigh our differences."
AP Writer Nasser Karimi in Tehran, Iran, contributed to this report.