Palestinians are reacting angrily to Barack Obama's first foreign policy speech as the presumptive U.S. Democratic presidential candidate in which he called for Jerusalem to be the "undivided" capital of Israel.

Speaking to the pro-Israeli lobby group American Israel Public Affairs Committee on Wednesday, Obama called for Jerusalem to "remain the capital of Israel."

Palestinian President Mahmoud Abbas was swift in his condemnation of the speech.

"This statement is totally rejected," he told reporters. " The whole world knows that holy Jerusalem was occupied in 1967, and we will not accept a Palestinian state without having Jerusalem as the capital."

Obama's comment comes as Israelis and Palestinians are in the midst of renewed U.S.-backed peace talks.

In his speech, Obama called Israel's security "sacrosanct" and "non-negotiable."

"The Palestinians need a state that is contiguous and cohesive and that allows them to prosper," said Obama. "But any agreement with the Palestinian people must preserve Israel's identity as a Jewish state, with secure, recognized and defensible borders. Jerusalem will remain the capital of Israel, and it must remain undivided."

He also condemned Hamas in his speech, saying the militant Islamist group must be isolated, adding "there is no room at the negotiating table for terrorist organizations."

Speaking to reporters in Washington after meeting with U.S. President George W. Bush, Israeli Prime Minister Ehud Olmert was effusive about Obama's speech, calling it "very moving" and "impressive."

Obama's picture and comments dominated the front page of most major Israeli newspapers Thursday with some commentators calling his speech an embrace of Israel.

But for the Palestinians, especially those living in East Jerusalem, the speech was seen as a blow to their hopes of the holy city becoming the capital of their future state.

Israel captured East Jerusalem from Jordan in the 1967 Six-Day War after the area had been under Arab control for years. The international community has never recognized Israeli sovereignty in East Jerusalem, with embassies housed in Tel Aviv instead.

Hosa Ahmed, a father of four and a drama teacher, said he fears Obama is willing to sellout Palestinian interests in order to win the presidency.

"If he [wants] to pay to be president, he [has] to pay from his pocket, not from our pocket. There [are] two people in Jerusalem," Ahmed told CBC News.

Many Palestinians had identified Obama as an underdog due to his minority status and hoped he might signal a change in the United States's perceived pro-Israeli bias, says Zakaria al-Qaq of Al-Quds University, an Arab university in Jerusalem. But with Obama's latest comments, that sentiment will change, al-Qaq said.

"It's distressing, and it's kind of really showing no respect for us," he said.

Republicans have taken aim at Obama for earlier remarks indicating the Democratic presidential hopeful would be willing to speak with U.S. foes such as Iran, whose president, Mahmoud Ahmadinejad, does not recognize Israel.

Not all Palestinians immediately abandoned their positive view of Obama, though, suggesting instead that his remarks are simply political posturing.

With files from the Associated Press