(Updates with Obama comment)
By Matt Spetalnick and Tabassum Zakaria
SHARM EL-SHEIKH, Egypt, May 18 (Reuters) - U.S. President George W. Bush sought to reassure skeptical Arabs on Sunday he is committed to securing a deal on Palestinian statehood before he leaves office, despite his outspoken support for Israel.
Wrapping up his Middle East tour in the Egyptian resort of Sharm el-Sheikh, Bush was looking to ease Palestinian dismay over his visit to Israel, where he lavished the Jewish state with praise, hailing it as a "homeland for the chosen people."
Bush used a speech to a mostly Arab audience at the World Economic Forum in Sharm el-Sheikh on Sunday to insist he "firmly believes" a Middle East peace agreement can be reached this year -- a deadline widely viewed as unrealistic.
Highly unpopular in the Muslim world because of the Iraq war, Bush alternately prodded and encouraged Arab allies on everything from oil to political reform, and urged them to isolate U.S. foes Syria and Iran for "supporting terrorism."
"We must stand with the Palestinian people, who have suffered for decades and earned the right to a homeland of their own," Bush said at the end of a five day Middle East tour.
Adjusting his approach from the one taken on his visit to Israel for its 60th anniversary, Bush pressed Palestinians to "fight terror" and called on Israel to make "tough sacrifices for peace and ease restrictions on Palestinians."
He was alluding to the hardship Palestinians face from Israeli roadblocks and barriers in the occupied West Bank, measures they call collective punishment but which Israel says are to defend it against militant attacks.
Bush’s more sympathetic words to the Palestinians, appeared aimed at countering Arab doubts, reinforced by his Israel visit, about his ability to act as an even-handed peacebroker.
He had stoked anger in a speech to Israel’s parliament on Thursday in which he pledged unflinching support for the Jewish state but made only one reference to Palestinians’ statehood dreams.
Bush’s call for Palestinian statehood drew the strongest applause but his reception was mostly muted, a far cry from the hero’s welcome he received in Israel.
After his speech to the conference, which was attended by Arab leaders such as Egyptian President Hosni Mubarak and Jordan’s King Abdullah, Bush left for Washington.
Commenting to reporters on board Air Force One on the impact of Bush’s visit, Secretary of State Condoleezza Rice said: "This is really a two-speech trip, not a one-speech trip.
"Today (Bush) had a chance to elaborate on that vision for the Palestinians."
THIRD VISIT TO REGION?
Despite little sign of significant advances toward peace on Bush’s second trip to the region this year, his national security adviser, Stephen Hadley, insisted Israeli and Palestinian negotiators had been making "tangible progress," and he left the door open for a third presidential visit.
Rice also said Israeli and Palestinian negotiators were privately discussing an agreement and the talks would intensify.
Bush, who met Palestinian President Mahmoud Abbas in Sharm el-Sheikh on Saturday, sought broader regional support for the peace process and urged Arab states to "move past their old resentments against Israel."
Bush’s trip follows a U.S.-hosted conference in Annapolis, Maryland, in November. Since then, talks have bogged down over Israeli settlement expansion in the West Bank and violence in and around the Gaza Strip, where Hamas cross-border rocket fire has triggered a tough Israeli military response.
Democratic presidential candidate Barack Obama said Bush’s successor in the White House could help achieve a peace agreement if both sides showed a willingness to compromise.
"The Israelis are going to have to acknowledge that some of the settlement policies make it very difficult to create a functioning Palestinian state. The Palestinians, they’ve got to recognize Israel and they’ve got to stop threatening violence," Obama said at a campaign stop in Gresham, Oregon.
Left-wing Israeli deputy Yossi Beilin, involved in previous negotiations with the Palestinians, said in a statement Abbas had told him he would consider resigning in six months if the Palestinians and Israel failed to reach a peace agreement.
But a spokesman for Abbas denied that the president had threatened to quit.
"President Abbas will continue to exert all effort to achieve a Palestinian state with Jerusalem as its capital," Nabil Abu Rdainah said in a statement.
During his trip, Bush also urged Arab leaders to stand by Lebanese Prime Minister Fouad Siniora against Hezbollah and to shun Iran over its nuclear program. Iran says it wants nuclear technology only for peaceful purposes.
He called on Arab governments to free all "prisoners of conscience" and open up political debate.
"Too often in the Middle East, politics has consisted of one leader in power and the opposition in jail," Bush said.
Reflecting concern over record oil prices during a presidential election year, Bush also warned Arab oil producers their supplies were limited and they must diversify their economies. His comments follow a visit to Saudi Arabia where he won a modest increase in oil output. (Additional reporting by Wafa Amr in Ramallah and Jeff Mason in Gresham, Oregon; Editing by Alison Williams)