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U.S. President Barack Obama voiced support for creation of a Palestinian state in talks on Monday with Prime Minister Benjamin Netanyahu, who held back from endorsing the main cornerstone of Washington's Mideast policy.

With Israeli leaders mostly skeptical of Obama's efforts to engage Iran diplomatically, Netanyahu had planned to stress Israel's growing concerns about Tehran's nuclear ambitions, Israeli officials said before the talks.

Obama, speaking along with Netanyahu to reporters in the Oval Office, said after the two-hour meeting that he saw no reason to set an artificial deadline for diplomacy with Iran, but the U.S. would like to see progress with Tehran by the end of the year.

He said he was not closing off a "range of steps" against Iran, including sanctions, if it continues its nuclear program, which Washington believes is aimed at producing an atomic weapon but Tehran says is for peaceful purposes.

Obama also reminded Israel of its commitment, under a 2003 U.S.-backed peace road map agreement to cease settlement activity in the West Bank.

"We talked about restarting serious negotiations on issues of Israel and the Palestinians," Obama said, adding that it was in the interests of both sides "to achieve a two-state solution."

Netanyahu, in his remarks, reiterated that he supported self-government for the Palestinians but made no mention of a state, a position underscoring a rare rift in U.S.-Israeli relations.

"We don't want to govern the Palestinians. We want them to govern themselves," Netanyahu said, echoing statements he has made in the past.

Obama sees engagement in Israeli-Palestinian peacemaking - in contrast to the Bush administration's largely hands-off approach - as crucial to repairing the U.S. image in the Muslim world and to convincing moderate Arab states to join a united front against Iran.

There have been signs Obama hopes to sway Netanyahu with the prospect of normalized ties between Israel and all Muslim countries, but such a comprehensive deal would require extraordinary diplomatic work by the United States.

After making a joint statement, Netanyahu spoke to Israeli reporters at the president's guesthouse at Blair House, saying that "it was a good meeting, friendly. There was a deep commitment to relations with the U.S., with whom we have a special relationship."

"Another thing was Iran," the prime minister continued, "a topic which consumed most of hour private one-on-one meeting. It was clear that he [Obama] understands the extent of the problem, for the world as well as for us, and he is committed to preventing Iran from gaining nuclear weapons."

"In regard to the settlements, we decided that this is something that needs to be implemented through commitments on both sides," Netanyahu added. "Israel has dismantled settlements and the Palestinians were supposed to dismantle terror infrastructure. In Gaza, we dismantled settlements and got huge terror infrastructure in return."

"The issue of [captive Israel Defense Forces soldier] Gilad Shalit was also raised, as did the situation in Gaza," Netanyahu continued. "We know that Hamas is continuing its efforts to arm itself and it is a real threat. We tried to find a balance between not harming the civilian population [in Gaza] and limiting Hamas' ability to smuggle weapons much more lethal than anything we've known in the past. I explained this to the president, that it isn't easy. We talked about it quite a bit."

When asked whether he plans to arrange a meeting with Palestinian President Mahmoud Abbas in the near future, Netanyahu replied "as far as I'm concerned, let's go, I'm ready."