DRESDEN, Germany - President Barack Obama expressed hope on Friday of making serious progress this year in Middle East peacemaking and said Israelis and Palestinians had to get serious about making tough compromises.

Obama repeated his call for Israel to halt settlement expansion in the West Bank, but he also pushed the Palestinians to improve security and for Arab states to match any Israeli steps toward peace with confidence-building gestures.

The Palestinians have to get serious about creating the security environment that is required for Israel to feel confident. Israelis are going to have to take some difficult steps, he said.

Obama, who sees Israeli-Palestinian progress as crucial to repairing the tarnished U.S. image in the Muslim world, was speaking a day after delivering an address in Cairo in which he offered Muslims a new beginning with the United States.

I am confident that if we stick with it ... we can make some serious progress this year, Obama told a news conference in Dresden with German Chancellor Angela Merkel on the third leg of a four-nation trip to the Middle East and Europe.

The moment is now for us to act on what we all know to be the truth, which is that each side is going to have to make some difficult compromises, Obama said.

Obama was in Germany on the third stop of his trip, which has already taken him to Saudi Arabia and Egypt. Saturday, he will attend commemorations in France marking the 65th anniversary of the World War Two D-Day landings.

Obama was due to pay homage to the victims of World War Two and the Holocaust, in which 6 million Jews died, during a tour of the Buchenwald concentration camp later with Merkel.

Obama's great uncle helped liberate a satellite camp of Buchenwald which was created by the Nazis. An estimated 56,000 people were killed in Buchenwald.

UNIQUE OPPORTUNITY

Obama has made finding a solution to the protracted Israeli-Palestinian conflict a top foreign policy priority and has plunged into Middle East politics, often a quagmire for his predecessors, early in his presidency.

Former President George W. Bush was seen as taking a hands-off approach to Middle East peacemaking until late in his administration. Muslims saw Bush as biased toward Israel.

I believe with the new U.S. administration, with President Obama there is a unique opportunity to see to it that the negotiation process is revived, Merkel said.

Israeli Prime Minister Benjamin Netanyahu, facing political pressure from both the left and the right at home, has rebuffed Obama's call for a settlement freeze and shied away from endorsing a two-state solution, a cornerstone of U.S. policy.

We have still not seen a firm commitment from the Palestinian Authority that they can control some of the border areas that Israel is going to be concerned about if there was going to be a two-state solution, Obama said.

If these and other issues, a crackdown on corruption in the West Bank, were not solved, the Israelis would have trouble moving forward, Obama said.

He called on Arab states to make some hard choices by opening up trade and offering diplomatic exchanges with Israel if it made tough commitments. Until now, Arab states have said Israel must fulfill its obligations under the 2003 road map peace plan before they will reciprocate.

Along with the Middle East crisis, Obama and Merkel also discussed the nuclear stand-off with Iran, the global financial crisis, climate change and the fate of prisoners at the U.S. military prison at Guantanamo Bay.

Obama is hugely popular in Germany, but relations between Washington and Berlin have been less than smooth since Obama took office in January.

Merkel prevented Obama from speaking at the Brandenburg Gate last summer during his presidential campaign and, facing an election in September, has resisted U.S. pressure to take inmates from Guantanamo and send more troops to Afghanistan.

The brevity of Obama's stay in Germany and his decision not to go to Berlin led to German media speculation of a rift, but the president dismissed this as wild speculation.

The truth of the matter is, the relationship between our two countries and governments is outstanding, Obama said. (Additional reporting by Kerstin Gehmlich and Noah Barkin)

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