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He added: "the United States can't force peace upon the parties" but America has "at least created the space, the atmosphere, in which talks can restart."
The president also announced he was dispatching special envoy George J. Mitchell back to the region next week to follow up on his speech in Cairo a day earlier in which he called for both Israelis and Palestinians to make concessions in the standoff.
Fresh from visits to Saudi Arabia and Egypt, Obama said that while regional and worldwide powers must help achieve peace, responsibility ultimately falls to Israelis and Palestinians to reach an accord.
He said Israel must live up to commitments it made under the so-called "Road Map" peace outline to stop constructing settlements, adding: "I recognize the very difficult politics in Israel of getting that done." He also said the Palestinians must control violence-inciting acts and statements, saying that Palestinian President Mahmoud Abbas "has made progress on this issue, but not enough."
Merkel, for her part, promised to cooperate on the long-sought goal. She said the two leaders discussed a time frame for a peace process but did not elaborate.
"With the new American government and the president, there is a truly unique opportunity to revive this peace process or, let us put this very cautiously, this process of negotiations," Merkel said.
Added Obama: "I think the moment is now for us to act on what we all know to be the truth, which is each side is going to have to make some difficult compromises."
While Obama did not address benchmarks, he told international reporters Thursday in Egypt: "I don't want to impose an artificial timeline." He added: "When things stall, everybody knows it ... I want to have a sense of movement and progress."
Touching Friday on an issue that has strained American-German relations, Obama also said he didn't seek any commitments from Germany to take a dozen terrorism suspects when the United States closes its prison at Guantanamo Bay, Cuba. German officials have said most should be resettled in America.
Merkel said her country is prepared to "constructively contribute" to U.S. closure efforts and said she was confident of eventually reaching a "common solution" on the prisoners' fate.
The two leaders spoke to reporters after meeting privately at a castle in this east Germany city that has bitter wartime memories. Starting on the night of Feb. 13, 1945, first British, then American bombers pounded the defenseless and largely non-strategic architectural gem, igniting a firestorm in which 25,000 people died - and in so doing, creating an enduring controversy.
Obama did not address the firebombing, and was in Dresden at the invitation of Merkel, who hails from her country's East.
Later, Obama became the first U.S. president to visit the Buchenwald concentration camp. An estimated 56,000 people, including some 11,000 Jews, perished there at the hands of Nazis. The stop was personal. A great-uncle helped liberate a nearby satellite camp, Ohrdruf, in early April 1945 just days before other U.S. Army units overran Buchenwald.
Accompanying Obama: Merkel, Elie Wiesel, a 1986 Nobel Peace Prize winner, author and Holocaust survivor whose father died of starvation at Buchenwald three months before liberation, and Bertrand Herz, also a Buchenwald survivor. Each laid a long-stemmed white rose at a memorial.
"To this day, there are those who insist the Holocaust never happened," Obama said. "This place is the ultimate rebuke to such thoughts, a reminder of our duty to confront those who would tell lies about our history."
"This place teaches us that we must be ever vigilant about the spread of evil in our own time," Obama added.
It was a pointed message to Iranian President Mahmoud Ahmadinejad, who has expressed doubts that 6 million Jews died at the hands of the Nazis.
"He should make his own visit" to Buchenwald, Obama told NBC in an interview earlier Friday. He added: "I have no patience for people who would deny history."
Separately, the president told reporters: "The international community has an obligation, even when it's inconvenient, to act when genocide is occurring."
After the tour, Obama was flying to Landstuhl medical hospital for private visits with U.S. troops recovering from wounds sustained in Iraq and Afghanistan. And he was ending the day in Paris - reuniting with his wife, Michelle, and daughters Malia and Sasha, who planned a brief holiday in the City of Light after commemorating the 65th anniversary of the Allies' D-Day invasion in France.
