Bush, in his fifth State of the Union speech as president, urged Americans to stay the course in Iraq and sought to convey optimism about the country's future in the face of weak approval ratings.
'The only way to protect our people, the only way to secure the peace, the only way to control our destiny is by our leadership,' Bush said. 'So the United States of America will continue to lead.'
Addressing both houses of Congress, he said spreading freedom and democracy was crucial for defeating terrorism and warned Americans against isolationism.
'In a time of testing, we cannot find security by abandoning our commitments and retreating within our borders,' Bush said. 'If we were to leave these vicious attackers alone, they would not leave us alone. They would simply move the battlefield to our own shores.'
Bush's 52-minute speech to lawmakers came after the most tumultuous year of his five-year presidency, marked by slumping support for the war in Iraq, ethical questions surrounding his administration and Republican party, and anger over the slow federal response to last year's Hurricane Katrina.
For Bush, the evening speech to a Republican-dominated Congress was a chance to regain the initiative three years before leaving office after his approval ratings hit all-time lows late last year.
On Iraq, Bush warned that withdrawing US troops prematurely would hand control of the country over to terrorists like Osama bin Laden and his lieutenant in Iraq, Musab al-Zarqawi.
'A sudden withdrawal of our forces from Iraq would abandon our Iraqi allies to death and prison, put men like bin Laden and Zarqawi in charge of a strategic country and show that a pledge from America means little,' Bush said.
Bush touted two rounds of Iraqi elections and the drafting constitution in 2005 as 'dramatic progress.'
Bush warned the Iranian government about its nuclear activities and its support for terrorism in the Palestinian territories and in Lebanon. He said the United States will rally the world to prevent Iran from developing nuclear weapons.
'The Iranian government is defying the world with its nuclear ambitions - and the nations of the world must not permit the Iranian regime to gain nuclear weapons,' Bush said. 'America will continue to rally the world to confront these threats.'
Iran is 'a nation now held hostage by a small clerical elite that is isolating and repressing its people,' Bush said.
On the Israeli-Palestinian conflict, Bush demanded that the militant group Hamas renounce violence and recognize Israel's right to exist following the group's electoral victory last week.
'The leaders of Hamas must recognize Israel, disarm, reject terrorism, and work for lasting peace,' Bush said.
He defended his decision to authorize the surveillance of telephone lines to intercept terrorist communications, and called on Congress to renew the Patriot Act, which was enacted following the September 11, 2001 terrorist attacks and gives the federal government broader powers to carry out investigations.
'If there are people inside our country who are talking with al- Qaeda, we want to know about it because we will not sit back and wait to be hit again,' Bush said, drawing cheers and applause from Congress.
Critics charge the spying effort and the Patriot Act are part of a Bush administration pattern of infringing on privacy and civil rights.
Democrats quickly criticized Bush's speech. Senate Minority Leader Harry Reid called it Bush's 'weakest' State of the Union performance yet.
In the official Democratic response, Virginia governor Tim Kaine accused the administration of misleading the US public into supporting the Iraq war and peeling back civil liberties.
'We have to give our troops the tools they need to win the war on terror. And we can do it without sacrificing the liberty that we've sent our troops abroad to defend,' Kaine said.
On the domestic front, Bush proposed a push to wean the United States off its dependence on foreign oil, calling it a 'serious problem' that requires more funding for clean energy - including nuclear power - and alternative fuels.
The goal, Bush said in his State of the Union speech, is to replace more than 75 per cent of US oil imports from the Middle East by 2025.
'America is addicted to oil, which is often imported from unstable parts of the world,' he said. The aim is to move the US 'beyond a petroleum-based economy and make our dependence on Middle Eastern oil a thing of the past,' Bush said, emphasizing the need to cut emissions at coal-fired power plans and promote wind, solar and nuclear energy.
Bush also proposed spending more than 136 billion dollars over the next decade to boost US economic competitiveness through investment in cutting-edge technologies, research and education, starting with primary schools.
'The American economy is pre-eminent - but we cannot afford to be complacent,' he said.
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