In a speech before he flew to Rome for a high-profile meeting with Pope Francis, Trump offered a forceful defence of the Jewish state and pledged to protect the country from Iran.
But he also vowed he was "personally committed" to helping Israel reach a deal with the Palestinians, while backtracking from previous claims that could be easier than thought to achieve.
"Making peace however will not be easy," Trump told an audience at the Israel Museum.
"Both sides will face tough decisions. But with determination, compromise and the belief that peace is possible, Israelis and Palestinians can make a deal."
He offered no detail and did not specifically mention the two-state solution, long the focus of international efforts and US Middle East diplomacy.
The parts of the speech offering a robust defence of Israel drew loud applause, which seemed to energise Trump on the second leg of his first foreign trip since taking office.
After mentioning threats to Israel from Hezbollah, Hamas and Iran, he said, "not with Donald J. Trump," drawing enthusiastic applause.
"I like you too," Trump said when the audience quietened.
Trump's speech, welcomed by Israeli right-wingers, came after he met Palestinian president Mahmud Abbas in Bethlehem in the occupied West Bank earlier in the day.
On Monday, he met Israeli Prime Minister Benjamin Netanyahu in Jerusalem.
Trump also laid a wreath and spoke at a ceremony at the Yad Vashem Holocaust memorial in Jerusalem on Tuesday.
The visit follows an initial leg in Saudi Arabia, where he urged Islamic leaders to confront extremism.
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'Evil losers'
Abbas had sought to convince the unpredictable US president to remain committed to an independent Palestinian state.
Trump arrived in Bethlehem by motorcade, crossing a checkpoint at Israel's controversial separation wall, and was greeted by Abbas and other dignitaries outside the city's presidential palace.
Abbas reiterated his call for a two-state solution to the conflict, including a Palestinian state with east Jerusalem as its capital.
"We are ready to open dialogue with our Israeli neighbours to build confidence and create a real opportunity for peace," he said after talks with Trump.
The US president used the occasion to also condemn the "evil losers" behind a bomb blast at a pop concert in the British city of Manchester that killed 22 people.
The talks came with hundreds of Palestinians in Israeli jails on hunger strike since April 17, which Abbas referred to in his remarks after meeting Trump.
Palestinians staged a general strike Monday in support of the prisoners.
Clashes broke out near a checkpoint between Jerusalem and Ramallah involving several hundred stone-throwing youths and Israeli soldiers who responded with rubber bullets and tear gas, leaving at least one wounded.
Disputed Jerusalem
Trump initially sparked deep concern among Palestinians when he backed away from the long-established US commitment to a two-state solution to the conflict.
Meeting Netanyahu in Washington in February, he said he would support a single state if it led to peace, delighting Israeli right-wingers who want to see most of the West Bank annexed.
During his election campaign, Trump also advocated breaking with decades of precedent and moving the American embassy from Tel Aviv to Jerusalem, alarming Palestinians.
He has since said the move is still being looked at.
At the same time, he urged Israel to hold back on settlement building in the West Bank, a longstanding concern of Palestinians and much of the world.
The most high-profile moment of Trump's stay in Jerusalem was his visit to the Western Wall, one of the holiest sites in Judaism.
He became the first sitting US president to visit the site in the Israeli-annexed east of the city.
He was not accompanied by any Israeli leaders during the visit.
Allowing them to do so could have led to accusations that Washington was implicitly recognising Israel's unilateral claim of sovereignty over the site, which would break with years of US and international precedent.
The status of Jerusalem is ultra-sensitive and has been among the most difficult issues in Israeli-Palestinian peace talks, stalled since April 2014.
Israel occupied the West Bank, including east Jerusalem, in the Six-Day War of 1967.
It later annexed east Jerusalem in a move never recognised by the international community and claims the entire city as its capital.
The Palestinians see east Jerusalem as the capital of their future state.
Trump will meet Pope Francis, with whom he has clashed repeatedly, on Wednesday morning at the Vatican. He travels on to Brussels in the afternoon before flying back to Italy late Thursday for a G7 summit on Friday and Saturday.
