President Obama received Palestinian President Mahmoud Abbas at the White House yesterday with an invaluable welcoming gift: a toughly worded, categorical US demand for Israel to stop expanding settlements in the West Bank.

But hours before the two men met, the Israeli government flatly rejected the demand. Spokesman Mark Regev said that "normal life in those communities must be allowed to continue," including some construction.

The exchange has set the stage for one of Obama's toughest foreign policy challenges. As he prepares to fly to the Middle East next week to give a speech on his policy toward the region and US-Muslim relations, it seemed clear yesterday that his administration is willing to risk prickly relations with one of the closest US allies - and possible anger from some Jewish voters - to try to create a Palestinian state.

"I am confident that we can move this process forward" if all sides live up to their obligations under the so-called 2003 roadmap to peace, Obama told reporters in the Oval Office, as he sat beside Abbas. "On the Israeli side, those obligations include stopping settlements. They include making sure that there is a viable, potential Palestinian state."

The Palestinian Authority, Obama said, has an obligation to continue building its security forces to stop militants' attacks on Israel, and to end anti-Israeli incitement in Palestinian mosques and schools. But the two men saw eye to eye on most issues, including the need to move quickly to achieve a Palestinian state.

"I believe that time is of the essence," Abbas said through an interpreter. "We should capitalize on every minute and every hour" in order to move the peace process forward.

Both Obama and Abbas have also emphasized the need for Arab governments to do more to support the peace process, including giving economic aid to the Palestinian government and formally recognizing the Jewish state if Israel strikes a deal with Palestinians.

But nowhere was the confluence of views so striking as it was in the Obama administration's position on settlements being built on land that both Obama and Abbas hope will become a Palestinian state. About 300,000 Israeli settlers live among more than 2 million Palestinians in the West Bank, which Israel occupied after the 1967 war. In a White House meeting last week, Obama told Prime Minister Benjamin Netanyahu of Israel that settlement construction must stop for the peace process to move forward.

On Wednesday, Secretary of State Hillary Rodham Clinton stunned the Israeli government by issuing one of the most comprehensive US warnings on settlements in recent memory, saying that Obama "wants to see a stop to settlements - not some settlements, not outposts, not natural-growth exceptions."

Her comments sparked joy among the Palestinian delegation. "The Palestinians actually got their major ask before they even arrived in Washington," said Gaith al-Omari, a former aide to Abbas who now works for the American Task Force on Palestine, a Washington-based advocacy group.

Omari said that Abbas has been exploring the possibility of giving Israel incentives to take steps toward peace by offering warmer relations with Arab neighbors. Abbas outlined his proposal before a small group of policy analysts at a hotel on Wednesday evening. Obama's Mideast envoy, George Mitchell, already appears to have been working behind the scenes along these lines.

Netanyahu has agreed to dismantle some settlement outposts built illegally in the West Bank. But the Israeli government insists that it has a right to continue to issue building permits in major settlements to accommodate new births of settlers, commonly referred to as "natural growth."

The Bush administration offered tacit allowances for natural growth during its eight years in office. Elliott Abrams, Bush's point man on Israel, said in a recent interview with the Globe that he agreed with the Israeli government that natural growth cannot be stopped.

"A democratic government cannot enforce a settlement freeze. It is impossible to say to a city of 38,000 that there will be no new units here and if you would like to add to your house because you just had twins, you can't," he said.

But yesterday some US officials said natural growth has to stop because it has become a cover for a broader Israeli policy of encouraging settlements as a way to increase leverage on Palestinians and control more land.

Statistics from the Israeli government's census bureau, compiled by the pro-peace group Americans for Peace Now, suggest that about 40 percent of the increase in settler population is from migration rather than births.

In 2007, about 9,602 Israeli babies were born in West Bank settlements, while 409 Israeli settlers died, resulting in a net gain of 9,193, according to the figures. But the same year, 17,007 settlers moved to the West Bank, while 11,667 left, resulting in a net gain of 5,340.

An Israeli official acknowledged yesterday that both births and migration are increasing the populations in settlements, but said the Israeli government, under previous prime minister Ehud Olmert, had stopped the mortgage subsidies and loan assistance incentives once used to get settlers to move to the West Bank. Still, housing is cheaper there, and some settlers move out of a religious belief that the land has been given to them by God.

The official, who spoke on condition of anonymity because of the sensitivity of the topic, said the Israeli government has stopped building new settlements and has decreased the issuing of permits or licenses to expand existing settlements by 30 percent.

The official also asserted that the settlements would not prevent the creation of a Palestinian state because Israel would give Palestinians other land in return.

"There has been a drastic decrease in that activity, but obviously, it isn't zero and it won't be zero," the official said. "We definitely have to discuss this thoroughly with the American administration. We don't necessarily see eye to eye 100 percent on that issue, but we have established a working group where we can work it out. We don't want to make a commitment that we cannot fulfill."

Even if Israel dramatically halts settlement activity, Abbas still faces an uphill battle to create a Palestinian state, not least of which is persuading Hamas to stop opposing peace talks and launching attacks on Israel. Abbas has been fighting for his own political survival, as the popularity of Hamas grows. But Obama tried to give him a boost yesterday.

"President Abbas . . . has been under enormous pressure to bring about some sort of unity government and to negotiate with Hamas," Obama said. "I am very impressed and appreciative of President Abbas's willingness to steadfastly insist that any unity government would have to recognize" Israel's right to exist and renounce violence.