The United States is a "proud partner" in helping to build Palestinian institutions and considers its financial support an investment in a "future Palestinian state" that would exisit "alongside the Jewish state of Israel," Obama said at a news conference in the West Bank city of Ramallah.
Obama appeared at the briefing with Palestinian President Mahmoud Abbas after flying to Ramallah by helicopter from Jerusalem, where he began his visit to the region on Wednesday.
The U.S. president said the only way to achieve the goal of an independent Palestinian state is through direct negotiations.
"There is no shortcut to a sustainable solution," he said.
As expected, Obama did not present any new plan to relaunch peace talks.
"He's made it very clear that he's not coming with any big new peace proposal. This is not what this visit is about. Last night, he made the point that he's here to listen," CBC's Saša Petricic reported from Jerusalem.
Still, Obama said he is not giving up on stalled peace talks, but added that continued Israeli settlement-building in the West Bank is not advancing the cause.
"We don't consider [the settlements] to be constructive, to be appropriate, to be something that can advance the cause of peace," he said.
As Obama's tour began on Wednesday, the U.S. president vowed to continue his administration's support of Israel. Israeli Prime Minister Bejamin Netanyahu, meanwhile, asserted Israel's right to defend itself.
Before Obama headed for Ramallah, Palestinian militants in Gaza fired two rockets at southern Israel. One of the rockets exploded in the courtyard of a house in the border town of Sderot early in the morning, causing damage but no injuries, said police spokesman Micky Rosenfeld. The other landed in an open field.
As a presidential candidate in 2008, Obama visited Sderot, which is frequently targeted by rocket attacks from the nearby Gaza Strip.
The militant Islamic group Hamas has ruled Gaza since 2007 after ousting the rival Palestinian Fatah group in bloody street fighting. The year before, Hamas won a majority in the new Palestinian parliament. Fatah and the Palestinian Authority, led by Abbas, now govern part of the West Bank only.
"We will be closely watching Palestinian President Abbas today to see if he condemns these attacks from Gaza against Israeli civilians," a senior Israeli government official in Jerusalem said after the attack.
"We noticed that last year when such attacks were going on, he refused to condemn them," said the official, speaking on condition of anonymity according to government regulations.
No claim of responsibility
No group immediately claimed responsibility for Thursday's attack. Gaza rocket fire on Israel has declined since a military campaign in November, but sporadic attacks persist. Last month a rocket was fired at the Israeli city of Ashkelon.
Over the past decade, Gaza militants have fired thousands of rockets and mortar shells at Israel.
Obama began his visit to the region on Wednesday. After a warm welcome at Ben-Gurion Airport, he viewed an Iron Dome battery that was transported there for his arrival.
The U.S. has invested more than $275 million into the missile defence system and plans to spend another $211 million on it this year. U.S. and Israeli officials credit the Iron Dome with preventing numerous rocket attacks from neighbouring Gaza.
Code Red sirens wailed in Sderot shortly after the 7 a.m. local time rocket attack, forcing the town residents who were on their way to work or school to run to bomb shelters.
Yossi Haziza, a Sderot resident in whose courtyard the first rocket exploded, was looking at the walls of his home sprayed with shrapnel and shattered windows.
"I wish this was merely damage to property but my eight year old daughter and my wife are terrified," Haziza said. "We just want to live in peace. We don't want to keep having to run to bomb shelters."