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United States President Barack Obama said Friday that the "moment is now" to push forward a two-state solution, adding that both the Palestinians and Israel must get serious and prepare to make some difficult compromises.

Speaking a day after offering the Islamic world a "new beginning" with the United States, Obama reaffirmed his commitment to the peace process, saying he feared that if action was not taken now Palestinians and Israelis could become too entrenched to return to the peace table.

"I am confident that if we stick with it, having started early, we can make some serious progress this year," Obama told a news conference in Dresden with German Chancellor Angela Merkel.

"The moment is now for us to act on what we all know to be the truth, which is that each side is going to have to make some difficult compromises," Obama said after talks with Merkel.

"The United States can't solve this problem," the president added. The U.S. can be a "partner" in discussions to provide a framework and support, Obama said, but "ultimately" Israel and the Palestinians must reach a solution on their own.

Obama noted that in just his first five months in office, "we've seen extraordinary activity already on this issue, and that sent a signal to all the parties."

Merkel told reporters during their joint press conference that Germany was interested in having a secure state of Israel as well as a viable Palestinian state.

"I believe with the new U.S. administration, with President Obama there is a unique opportunity to see to it that the negotiation process is revived," Merkel said.

Obama was in Germany on the third stop of a four-country trip that has already taken him to Saudi Arabia and Egypt, where he delivered a major address to Muslims on Thursday.

Obama also reiterated that he was serious about engaging Iran in dialogue over its contentious nuclear program, adding that he and Merkel had agreed that Tehran must be stopped before a nuclear arms race breaks out in the Middle East.

Following President Obama's address on Thursday, the U.S. administration is now trying to lower tensions with Israel.

Senior White House officials told Haaretz following the president's speech that "there is no crisis in our relationship with Israel, and we will succeed in reaching understandings on the matter of settlements."

Prime Minister Benjamin Netanyahu publicly commended Obama's speech in a statement issued by his bureau. In private conversations, however, he expressed disappointment at what he saw as a soft stance on Iran's nuclear ambitions.

Netanyahu watched Obama's speech with his closest advisers in his office in Jerusalem Thursday afternoon. Tension and uncertainty dominated the bureau ahead of the address, but was partly assuaged by a telephone call earlier in the day from Obama's aides to brief the Israeli leadership on some of the details of the speech that pertained to Israel, such as the call for establishing a Palestinian state and the demand for a freeze in settlement activity.

Following the speech, Netanyahu met again with his advisers, and then with ministers Moshe Ya'alon, Benny Begin and Dan Meridor. Also attending the meeting was Dov Weissglas, former prime minister Ariel Sharon's bureau chief, whom Netanyahu has consulted to find out what agreements Israel reached with the Bush administration over the road map peace plan and the settlements.

Saturday evening, after Foreign Minister Avigdor Lieberman and Defense Minister Ehud Barak return from their trips abroad, Netanyahu will convene a meeting with them plus Ya'alon, Begin and Meridor.

For all its praise for Obama's address, the skepticism in the statement issued by the prime minister's bureau was unmistakeable. The carefully worded statement expressed hope that "President Obama's important speech in Cairo will lead to a new period of reconciliation between the Arab and Muslim world and the State of Israel. We share President Obama's hope that the American effort will inaugurate a new era that will result in an end to the conflict and in pan-Arab recognition of Israel as the State of the Jewish people, which lives in security and peace in the Middle East."

"Israel is committed to peace and will assist as much as it can in broadening the circle of peace, while taking into account its national interests, first and foremost, its security," the statement added.

Behind closed doors, however, Netanyahu and his aides adopted a somewhat different tone. While expressing satisfaction with Obama's call to the Arab states to recognize Israel and move ahead with normalization, as well as the emphasis on the strong ties between Israel and the U.S., they expressed disappointment with Obama's message regarding Iran and its nuclear ambitions.

Sources close to Netanyahu said that contrary to expectations, Obama did not reiterate the statements he had made in the past about the need to prevent Iran from acquiring nuclear arms, or about the need to reevaluate the nature of dialogue between Washington and Tehran by the end of 2009.

Sources in the prime minister's bureau also said that the tensions with the U.S. over settlements had been aggravated by the Cairo speech.

"There will be no agreement on this unless the Americans soften their stance," a source close to Netanyahu said Thursday.

Nevertheless, a senior White House official told Haaretz that "there is no crisis with Israel. We are working together with the Israelis in order to reach agreements and understandings regarding settlement construction and we will succeed in doing so."

The senior official added that the response of Netanyahu's bureau to the speech showed that "Israel understands that President Obama is trying to further peace in the region. Their response shows that there is a good will and readiness to work together."

"A way must be found to progress on the peace process," the official continued, "but we must emphasize that the president has made clear to the Arab and Muslim world that the bond between the U.S. and Israel is powerful and will not be broken."

Following his address in Cairo, Obama held a 45-minute meeting with seven journalists from Egypt, Lebanon, Saudi Arabia, the Palestinian Authority, Israel, Malaysia and Indonesia.

In response to a question on the steps the U.S. will take regarding the settlements, Obama said: "It's only been five months for me, Netanyahu has only been in office for two months, we've been waiting 60 years. So maybe we should try out a few more months before everybody starts looking at doomsday scenarios. This is difficult and it is going to take time."

"The Israelis have difficult decisions to make," he continued. "As I said in my speech, these settlements are an impediment to peace. That's not to deny the fact that there are people who are living in these settlements, there is a momentum to some of these settlements, and turning the back on those settlements involves very tough choices. That's why I said that America cannot do this for the parties."

Regarding the ties between the U.S. and Israel, Obama said: "I tried to make very clear in this speech that the bond between the United States and Israel is unbreakable, [and] will be whether there is a Democratic president or a Republican president, if there is a Democratic Congress or a Republican Congress. The ties are just very deep. So expecting a break between the U.S. and Israel is something that people should not anticipate."

On his relations with Netanyahu, he said, "I have had three meetings with Netanyahu, the first two when I was a senator, and one recently when I was at the White House. In each case I found him a very intelligent person, an excellent communicator."

"Just as so many Palestinians lost confidence and faith that the process can move forward, I think many Israelis lost confidence that they will ever be recognized by Arab states or there will be security," he continued. "So I believe Netanyahu will recognize the strategic need to deal with this issue and in some ways he may have an opportunity that a Labor or a left leader might not have."

On the peace process, the U.S. President said that "what is required is a serious, long-term engagement. We have set up various parameters on how we are going to approach the problem, and my hope and expectation - there is going to be some difficulties, but hopefully both the Israelis and the Palestinians would recognize this is in their interest. That's the main thing I wanted to emphasize in my speech."