Barack Obama went to the Yad Vashem museum after seeing the graves of Theodor Herzl, the founder of modern Zionism, and former Israeli PM Yitzhak Rabin.
He is touring Bethlehem’s Church of the Nativity before flying to Amman for talks with Jordan’s King Abdullah.
On Thursday, President Barack Obama urged Israelis and Palestinians to resume peace talks.
Barack Obama told an audience of some 2,000 young Israelis in Jerusalem that they could be “the generation that permanently secures the Zionist dream” or “face growing challenges to its future”.
“The only way for Israel to endure and thrive as a Jewish and democratic state is through the realization of an independent and viable Palestine,” the president warned.
Hours earlier, after holding talks with Palestinian Authority President Mahmoud Abbas in Ramallah, Barack Obama urged Palestinians to return to the negotiating table even if Israel did not meet their condition of halting Jewish settlement construction.
“If we’re going to succeed, part of what we’re going to have to do is to get out of some of the formulas and habits that have blocked progress for so long,” he said.
“Both sides are going to have to think anew.”
About 500,000 Jews live in more than 100 settlements built since the 1967 occupation of the West Bank and East Jerusalem. The settlements are considered illegal under international law, though Israel disputes this.
Barack Obama began his third and final day in Israel by travelling to the grave of Theodore Herzl, who died in 1904 before his dream of a Jewish homeland was realized.
Accompanied by Israeli President Shimon Peres and PM Benjamin Netanyahu, he laid a wreath and placed a small rock on the headstone, a Jewish custom.
“It is humbling and inspiring to visit and remember the visionary who began the remarkable establishment of the State of Israel,” Barack Obama wrote in the visitors’ book.
“May our two countries possess the same vision and will to secure peace and prosperity for future generations.”
Barack Obama then walked to the grave of Yitzhak Rabin, who was assassinated by a right-wing extremist after a peace rally in support of the Oslo Accords in 1995.
He again laid a wreath and placed a rock on the headstone, and reportedly told Yitzhak Rabin’s children and grandchildren that he had been “a great man”, adding: “Sometimes it is harder to embark on peace than to embark on war.”
Barack Obama later visited the Yad Vashem Holocaust memorial, which he said illustrated the depravity to which man could sink but also served as a reminder of the “righteous among nations who refused to be bystanders”.
“The state of Israel does not exist because of the Holocaust, but with the survival of a strong Jewish state of Israel, such a holocaust will never happen again,” he added.
The Church of the Nativity was originally built in 399 above a cave traditionally believed to be the birthplace of Jesus and rebuilt after fire in the 6th Century, it is among the holiest sites in Christianity.
On Friday afternoon Barack Obama will fly to Jordan, where he plans to hold talks with King Abdullah and spend the night.
Barack Obama and King Abdullah are expected to discuss Jordan’s struggle to cope with the influx of more than 350,000 refugees from Syria, the stalled Middle East peace process, and efforts at political reform in the kingdom.
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