U.S. President Barack Obama has called on Israel to reverse an "undertow of isolation" and for its citizens to demand change from their leaders in order to secure peace.

Obama stressed in a speech on Thursday to university students at the International Convention Center in Jerusalem that Israel must make peace with the Palestinians if it is to ensure its survival and long-term viability as a homeland for the Jewish people. But he said the will of the people to achieve peace should be made known to the Israeli leadership.

"That is where peace begins – not just in the plans of leaders, but in the hearts of people; not just in a carefully designed process, but in the daily connections that take place among those who live together in this land, and in this sacred city of Jerusalem.

"Speaking as a politician, I can promise you this: political leaders will not take risks if the people do not demand that they do. You must create the change that you want to see," Obama said.

The U.S. president said peace in the Middle East is "necessary" because it is the "only true path" to security. He said the only way for Israel to endure and thrive in the region as a Jewish and democratic state is through the realization of an "independent and viable Palestine."

Given the frustration of the international community, the president said Israel "must reverse an undertow of isolation" to aid the process.

Obama is on his first visit to the close U.S. ally Israel as president. He spoke after a trip to the West Bank, where he met with Palestinian President Mahmoud Abbas. He later told a news conference in Ramallah that Palestinians deserve a sovereign state, and "an end to occupation and the daily indignities that come with it."

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.

Obama appeared at the briefing with Abbas after flying to the West Bank city 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.

U.S. President Barack Obama and Palestinian President Mahmoud Abbas shake hands during their bilateral meeting at the Muqata Presidential Compound in the West Bank city of Ramallah on Thursday. (Pablo Martinez Monsivais/Associated Press)

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."