Speaking to a joint session of the US Congress and a television audience of millions, Bush had tough words for Syria and Iran and a rare message to allies Egypt and Saudi Arabia that they, too, must embrace democratic reforms.
Bush said that Sunday's elections in Iraq had opened "a new phase" for US-led efforts there, and declared that American troops would increasingly play "a supporting role" to fledgling Iraqi security forces.
But he categorically rejected calls to set a specific timetable for pulling the roughly 150,000 US troops from that war-torn country, saying: "That would embolden the terrorists and make them believe they can wait us out."
"In the end, Iraqis must be able to defend their own country - and we will help that proud, new nation secure its liberty," the president said.
Bush used his annual address to recommit himself to the Middle East peace process and asked lawmakers for 350 million dollars to promote Palestinian political, economic and security reforms.
"The goal of two democratic states, Israel and Palestine, living side by side in peace is within reach - and America will help them in achieving that goal," the US president said.
Bush noted that US Secretary of State Condoleezza Rice was leaving on Thursday on a trip that will take her to Israel and the West Bank for talks with Israeli Prime Minister Ariel Sharon and Palestinian leader Mahmud Abbas.
The president's remarks fleshed out this inauguration promise two weeks ago to spread democracy in the Middle East as the antidote to the extremism that spawned terrorists like those who carried out the September 11, 2001 attacks.
Bush charged that Iran "remains the world's primary state sponsor of terror - pursuing nuclear weapons, while depriving its people of the freedom they seek and deserve".
In addition to admonishing Egypt and Saudi Arabia, Bush warned Damascus and Tehran to stop backing terrorism and declared: "To the Iranian people, I say tonight: As you stand for your own liberty, America stands with you."
"The government of Saudi Arabia can demonstrate its leadership in the region by expanding the role of its people in determining their future. And the great and proud nation of Egypt, which showed the way toward peace in the Middle East, can now show the way toward democracy in the Middle East," he said.
Where he had lumped Iran with North Korea and Saddam Hussein's Iraq in an "axis of evil" in his 2002 State of the Union, Bush said he was working with the European allies to defuse the dispute over Iran's atomic ambitions.
And he made just a one-sentence reference to the crisis over North Korea's nuclear programmes, saying he was co-operating with the Asian countries to end the crisis over Pyongyang's nuclear programmes.
Ahead of the speech, White House Spokesman Scott McClellan called North Korea's nuclear programme and "past and continuing" sales of weapons technology "a threat to global peace," adding: "We would urge North Korea to return to the six-party talks soon."
Throughout the speech, there were symbolic touches: Some Republican lawmakers had blue dye on their fingers, imitating the purple ink on the hands of Iraqi voters. In First Lady Laura Bush's guest box, the mother of a US Marine killed in Iraq hugged the daughter of an Iraqi man slain by Saddam's secret police in 1996, and the two briefly got tangled when the Marine's dog tag - held by his mother - snagged the Iraqi woman's sleeve.
On the domestic front, Bush urged the US Congress to help overhaul the beloved government-run Social Security pension programme, which he proposes to partially privatise. The controversial proposal has polarised lawmakers.
Bush also called for fiscal restraint ahead of unveiling his 2006 budget on Monday, when he is expected to propose a virtual freeze on discretionary spending, excluding defence and homeland security.
The president's remarks were interrupted numerous times by thunderous cheers and applause from Republican lawmakers, while the Democratic ranks remained in stony silence and in some cases, as when Bush rolled out his pension programme, even heckled and shouted "No! No!"
In their response to Bush's speech, top Democratic lawmakers said Bush was on the wrong track in his proposal to reform the pension system, and inadequate in his planning for Iraq.
Senate Minority Leader Harry Reid said Bush's plan to privatise social security was "dangerous" because it would add another two trillion dollars on the already record high 4.3 trillion dollars national debt. "That's an immoral burden to place on the backs of the next generation," he added.
Nancy Pelosi, Minority Leader in the House of Representatives, tackled Bush's Iraq policy: "We have never heard a clear plan from this administration for ending our presence in Iraq. And we did not hear one tonight."
Pelosi also chided the president for inadequately protecting the homeland from terrorism: "Despite the administration's rhetoric, airline cargo still goes un-inspected, shipping containers go unscreened, and our railroads and power plants are not secure." "For three years, the president has failed to put together a comprehensive plan to protect America from terrorism, and we did not hear one tonight," Pelosi said.
Meanwhile, Syria and Iran dismissed as baseless US President George W. Bush's attacks on their policies in the Middle East.
Syrian Foreign Ministry Spokeswoman Bushra Kanafani said Damascus was doing all it could to stop fighters crossing into Iraq and had offered Baghdad a security agreement.
Kanafani urged Washington to pursue Arab-Israeli peace talks. "Our position in support of peace is clear," she told Reuters.
Iran dismissed Bush's charge that it is secretly pursuing nuclear weapons and his description of the Islamic republic as the "world's primary state sponsor of terror".
"These claims have no basis," the state news agency IRNA quoted Foreign Ministry Spokesman Hamid Reza Asefi as saying.