Camp David - The United States still believes Israel's long-term security is best served by reaching an agreement to live alongside a recognized Palestinian state, President Barack Obama said Thursday.

Obama was speaking shortly after Israel's Prime Minister Benjamin Netanyahu formed a new right-wing ruling coalition seen as likely to further strain already damaged ties with the Palestinians.

"I continue to believe a two-state solution is absolutely vital for not only peace between Israelis and Palestinians, but for the long-term security of Israel as a democratic and Jewish state," Obama told a Camp David news conference.

The traditionally close alliance between the United States and Israel has been damaged by disagreement over the peace process with the Palestinians and by the perception of personal animus between Obama and Netanyahu.

While both sides continue to pay public tribute to the relationship, the new Israeli government appears unlikely to make the kind of concessions needed to restart the moribund negotiations.

Obama insisted, however, that a two-state solution remains the only available option for bringing the simmering conflict to an end.

"I know that a government has been formed that contains some folks who don't necessarily believe in that premise, but that continues to be my premise," he said.

Noting that he was speaking at Camp David, Obama referred back to a 1978 deal negotiated at the same US presidential retreat that brought peace between Israel and Egypt.

"Israel is better off for it. I think the same would be true if we get a peace deal between Israelis and Palestinians," he said.

"That prospect seems distant now, but I think it's always important for us to keep in mind what's right and what's possible." (AFP)