In a joint news conference in Ramallah, Obama said both sides should overcome their respective concerns about one another's commitment to the peace process.
"That's not to say settlements aren't important, that's to say if we resolve the (main) problems, then settlements will be resolved," Obama said, referring to the Palestinians' refusal to negotiate while Israel continues to build on Palestinian land.
"If to begin the conversation we have to get everything right from the outset ... then we're never going to get to the broader issue, which is how do you structure a state of Palestine," Obama said.
President Mahmoud Abbas, speaking directly after Obama, responded defiantly that the Palestinian position on settlements had not changed.
"It isn't just our perception that settlements are illegal. It is a global perspective. Everybody views settlements not only as a hurdle, but more than a hurdle to a two-state solution," he said.
"We are asking for nothing outside the international legitimacy. It is the responsibility of the Israeli government to halt settlement activities so we can at least speak."
He added: "We hope that the Israeli government understands this. We hope they listen to the many opinions inside Israel itself speaking of the illegality of settlements."
Neither side directly referenced a report in The New York Times on Thursday suggesting Abbas would ask Obama for help securing an unannounced settlement freeze from Israel's prime minister.
But Abbas said that during his meeting with Obama, "We spoke about (settlements) with Mr President (Obama) and we clarified our point of view about how we can reach a solution."
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