Trying to advance debate in the explosive Middle East, U.S. President Barack Obama on Thursday endorsed a key Palestinian demand for the borders of its future state and prodded Israel to accept that it can never have a truly peaceful nation that is based on "permanent occupation."

Obama's urging that a Palestinian state be based on 1967 borders — those that existed before the Six Day War in which Israel occupied East Jerusalem, the West Bank and Gaza — was a significant shift in U.S. policy and seemed certain to anger Israel.

Israel has said an endorsement of the 1967 borders would prejudge negotiations. Obama also took pains to show respect for Israel's views ahead of his meetings Friday with Prime Minister Benjamin Netanyahu.

But in a statement released after the speech, Netanyahu rejected a return to his country's 1967 borders, calling the 1967 lines "indefensible."  The Israeli prime minister  said he would seek clarification with Obama during their meeting.

Palestinian refugees

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In his speech, U.S. President Barack Obama highlighted the problem of what to do with the millions of Palestinian refugees who continue to live in exile as the decades-old Arab-Israeli conflict drags on. CBCNews.ca gives you an inside look into what life is like for these refugees in a unique, interactive online documentary called Exile Without End: Palestinians in Lebanon. Award-winning CBC News correspondent Nahlah Ayed and her Radio-Canada colleagues spent two weeks documenting life in Shatila, a Palestinian refugee camp in Beirut built in the wake of the 1948 Arab-Israeli War where 12,000 people still live today. Through an immersive, street-level interface, the documentary website will take you inside Shatila and allow you to follow the moving personal stories of its residents and experience firsthand the atmosphere of the camp.

The president cautioned that the recent power-sharing agreement between the mainstream Palestinian faction led by Mahmoud Abbas and the radical Hamas movement that rules Gaza "raises profound and legitimate" security questions for Israel. Netanyahu has refused to deal with a Palestinian government that includes Hamas.

"How can one negotiate with a party that has shown itself unwilling to recognize your right to exist?" Obama asked. "In the weeks and months to come, Palestinian leaders will have to provide a credible answer to that question."

Obama also rejected a push by the Palestinians for U.N. recognition of a state in the West Bank, Gaza and East Jerusalem this fall. "Symbolic actions to isolate Israel at the United Nations in September won't create an independent state," Obama said.

But Obama said he would support agreed-upon territorial swaps between the Israelis and the Palestinians, leaving the door open for Israel to retain major West Bank settlements, where the vast majority of its nearly 300,000 Jewish settlers live.

Netanyahu said he would urge Obama to endorse a 2004 American commitment, made by former president George W. Bush, to Israel. In a letter at the time, Bush said a full withdrawal to the 1967 lines was "unrealistic" and a future peace agreement would have to  recognize "new realities on the ground." Israelis have interpreted Bush's commitment as U.S. support for retaining the major settlement blocs.

The Palestinians oppose any Israeli presence in their future state.

Warning to Syria

Obama also called for Syrian President Bashar Assad to lead his country to democracy or "get out of the way," his most direct warning to the leader of a nation embroiled in violence.

Word cloud comparison

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Compare  U.S. President Barack Obama's recent speech against remarks he made about U.S. Mideast policy at Cairo University on June 4, 2009.

The president said the United States has a historic opportunity and the responsibility to support the rights of people clamouring for freedoms.

On Syria, Obama said the government "has chosen the path of murder and the mass arrests of its citizens." He praised the Syrian people for their courage in standing up to repression in a bloody crackdown that has killed hundreds.

Obama said the region's revolutions speak to a "longing for freedom" that has built up for years and has led to the overturning of tyrants — with perhaps more to fall.

He embraced the call for change and compared it to signature moments of U.S. history such as the American Revolution and the civil rights movement.

Hails killing of bin Laden

The president spoke at the U.S. State Department in his first comprehensive remarks on the astonishing ripples of change in the Middle East. He hailed the killing of al-Qaeda leader Osama bin Laden and declared that bin Laden's vision of destruction was fading even before U.S. forces shot him dead.

Obama said the "shouts of human dignity are being heard across the region."

The president noted that some "true leaders" had stepped down and that "more may follow." He quoted civilian protesters who have pushed for change in Egypt, Libya, Syria and Yemen but noted that among those countries, only Egypt had seen the departure of a long-ruling autocratic leader.

Obama said that while there will be setbacks that accompany progress with political transitions, the movements present a valuable opportunity for the U.S. to show which side it is on.

"We have a chance to show that America values the dignity of the street vendor in Tunisia more than the raw power of a dictator," he said, referring to the fruit vendor who killed himself in despair and sparked a chain of events that unleashed uprisings around the Arab world.