By Jeffrey Heller and Matt Spetalnick
WASHINGTON (Reuters) - President Barack Obama voiced support for creation of a Palestinian state in talks on Monday with Prime Minister Benjamin Netanyahu, who held back from endorsing the main cornerstone of Washington's Mideast policy.
"We talked about restarting serious negotiations on issues of Israel and the Palestinians," Obama said, adding that it was in the interests of both sides "to achieve a two-state solution."
Obama, speaking along with Netanyahu to reporters in the Oval Office, also reminded Israel of its commitment, under a 2003 U.S.-backed peace "road map" to cease settlement activity in the occupied West Bank.
Netanyahu, in his remarks, reiterated that he supported self-government for the Palestinians but made no mention of a state, a position underscoring a rare rift in U.S.-Israeli relations.
"We don't want to govern the Palestinians. We want them to govern themselves," Netanyahu said, echoing statements he has made in the past.
Obama sees engagement in Israeli-Palestinian peacemaking -- in contrast to the Bush administration's largely hands-off approach -- as crucial to repairing the U.S. image in the Muslim world and to convincing moderate Arab states to join a united front against Iran.
There have been signs Obama hopes to sway Netanyahu with the prospect of normalized ties between Israel and all Muslim countries, but such a comprehensive deal would require extraordinary diplomatic work by the United States.
The Iranian issue loomed large over the White House talks.
With Israeli leaders mostly sceptical of Obama's efforts to engage Iran diplomatically, Netanyahu had planned to stress Israel's growing concerns about Tehran's nuclear ambitions, Israeli officials said before the talks.
Obama said after the meeting he saw no reasons to set an artificial deadline for diplomacy with Iran, but the United States would like to see progress with Tehran by the end of the year.
He said he was not closing off a "range of steps" against Iran, including sanctions, if it continues its nuclear program, which Washington believes is aimed at producing an atomic weapon but Tehran says is for peaceful purposes.
(Editing by Eric Beech)