U.S. President George W. Bush wrapped up a regional tour on Sunday saying peace in the Middle East was possible by the end of the year but that it required "tough sacrifices."
In a speech to an economic forum in Egypt, Bush also again took aim at arch-foe Iran over its nuclear drive and criticized nations in the region over the lack of political freedom and human rights.
"I firmly believe that with leadership and courage, we can reach that peace agreement this year... This is a demanding task, and it requires action on all sides," he said.
"Palestinians must fight terror and continue to build the institutions of a free and peaceful society. Israel must make tough sacrifices for peace and ease restrictions on Palestinians."
Bush has faced Arab skepticism over the chances of Israeli-Palestinian peace with negotiations so far failing to make any visible progress -- and Arab anger over perceived bias towards the Jewish state.
The president began his tour in Israel where he addressed parliament to mark the state's 60th anniversary, hailing U.S. ties with its staunch ally and making only brief mention of Palestinian statehood aspirations.
"Bush's speech in front of the Knesset angered us," Palestinian President Mahmoud Abbas told reporters in the Red Sea resort of Sharm el-Sheikh during the Middle East World Economic Forum (WEF).
"We don't want the Americans to negotiate on our behalf... All that we want from them... is a minimum level of neutrality," Abbas said. "We have asked that the American position be balanced."
On Saturday, the U.S. leader pledged his determination to help achieve the "dream" of a Palestinian state, but Abbas spokesman Nabil Abu Rudeina laid the blame for the slow pace of negotiations on Israel.
"What Bush dreams should be implemented on the ground," he said.
U.S. Secretary of State Condoleezza Rice said later that negotiators from both sides were holding serious discussions in private and that these talks would probably intensify.
In his speech, Bush called on the world to prevent Tehran from obtaining the nuclear bomb and to isolate Iran and its ally Syria.
"Every peaceful nation in the region has an interest in stopping these nations from supporting terrorism," Bush said.
"To allow the world's leading sponsor of terror to gain the world's deadliest weapon would be an unforgivable betrayal of future generations. For the sake of peace, the world must not allow Iran to have a nuclear weapon."
OPEC member Iran has repeatedly denied seeking the atomic bomb and says its nuclear program is aimed solely at generating energy.
Bush also called on regional states to confront Palestinian Islamist group Hamas, "which is attempting to undermine efforts at peace with continued acts of terror and violence."
Israel is mulling possible action against the Hamas-ruled Gaza Strip to try to end militant rocket attacks, although Egypt is trying to mediate a truce.
Bush also urged Middle East nations to oppose the Shiite movement Hezbollah in Lebanon, where fighting this month between pro- and anti-government forces killed 65 people and pushed the country to the brink of civil war.
"We must stand with the people of Lebanon in their struggle to build a sovereign and independent democracy. This means opposing Hezbollah terrorists, funded by Iran, who recently revealed their true intentions by taking up arms against the Lebanese people."
Feuding Lebanese leaders are holding talks in Qatar aimed at ending the crisis but have faltered over the issue of Hezbollah weapons.
Bush also chided Middle East states for their repression of democratic activists and called for the release of political prisoners, in comments likely to embarrass host Egypt which Washington has repeatedly criticized over human rights.
"The time has come for nations across the Middle East to abandon these practices and treat their people with the dignity and respect they deserve."