Speaking after meetings with Palestinian leaders in the West Bank on Thursday and Israeli leaders in Jerusalem the day before, Bush said: "Now is the time to make difficult choices."
Bush's visits to Israel and the Palestinian West Bank are part of his eight-day tour of the Middle East designed to advance the peace process and end the violent, protracted conflict in the region.
He called for an end to the Israeli "occupation" of Palestinian lands and a resolution for Jerusalem's status.
The Palestinians insist that all of the West Bank and east Jerusalem, seized by Israel in the 1967 war, should be theirs. Israel wants to keep parts of east Jerusalem and the West Bank.
The parties' commitment to resume peace talks after a seven-year hiatus produced at the U.S.-hosted Middle East conference in November was stalled over Israel's plans to build 307 new homes in an area near Jerusalem.
Earlier on Thursday, Bush said he was confident the Israelis and Palestinians would sign a peace deal leading to the emergence of a Palestinian state before he leaves office in January.
While on his first ever visit to the Palestinian territories, Bush urged President Mahmoud Abbas to curb terrorist and rocket attacks on Israel by Islamists. He highlighted Hamas, the radical Palestinian group that seized control of the Gaza Strip in summer, as a major hindrance to the peace process.
The president also pledged to urge Arab states to "reach out" to Israel. On Friday, Bush will fly to Kuwait, and will then visit Bahrain, the United Arab Emirates, Saudi Arabia and Egypt.
