President Obama says Israeli and Palestinian negotiators face "hard work and hard choices" in direct peace talks set to open in Washington tonight.
The meeting comes after a divided Israeli Cabinet agreed to release 104 long-term Palestinian prisoners convicted of deadly attacks.
"The most difficult work of these negotiations is ahead, and I am hopeful that both the Israelis and Palestinians will approach these talks in good faith and with sustained focus and determination," Mr Obama said in a statement.
The US president said he believed peace between the two parties was both "possible and necessary."
Israeli President Shimon Peres has formally asked Prime Minister Benjamin Netanyahu to form the next government after a majority of newly elected lawmakers recommended him to lead the country.
Mr Netanyahu has six weeks to form a governing coalition for what would be his third term as Israeli premier, but faces a challenge drawing secular and religious parties under one umbrella.
Mr Netanyahu said the government's next priorities should be to prevent Iran from building a nuclear weapon, to deal with the stockpile of weapons in the region and to make peace with the Palestinians.
Palestinian President Mahmoud Abbas was given a hero's welcome on his return to Ramallah following the UN General Assembly's vote to upgrade Palestine's status from "observer entity" to "non-member state".
However, the upgrade falls short of full UN membership, which only the Security Council can grant.
In a speech broadcast on state television, he told the cheering crowds who greeted him, "Yes, now we have a state".
"Congratulations to all of you brave Palestinians; you alone have accomplished this achievement and alone have won this victory", he said.