His remarks received a standing ovation from both Democratic and Republican representatives.
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Obama also promised to deal with the Iranian threat, saying: "We will do what is necessary to prevent them from getting a nuclear weapon."
The hour-long speech was dominated by domestic issues, as Obama challenged deeply divided lawmakers to find compromises that would boost job creation and strengthen America's middle class. He conceded America's economic revival is an "unfinished task."
The annual address is one of the biggest events in Washington. It is broadcast during prime evening viewing hours by the major television networks, with Washington's most powerful officials – lawmakers, Supreme Court justices, military leaders and Cabinet members – all in attendance and millions of Americans watching from home.
This year's speech came at one of the strongest points in Obama's presidency. He won reelection by a convincing margin, is generally popular, and opposition Republicans appear weakened and fractured. Still, Republicans control the House of Representatives and tough fights loom on the budget and other top issues.
'I'll travel to Middle East next month'
Foreign policy received less attention, but took on greater urgency as the speech came hours after North Korea detonated a nuclear device. Obama said "provocations" like the test will further isolate North Korea "as we stand by our allies, strengthen our own missile defense, and lead the world in taking firm action in response to these threats."
Likewise, the leaders of Iran must recognize that now is the time for a diplomatic solution, because a coalition stands united in demanding that they meet their obligations, and we will do what is necessary to prevent them from getting a nuclear weapon.
"At the same time, we will engage Russia to seek further reductions in our nuclear arsenals, and continue leading the global effort to secure nuclear materials that could fall into the wrong hands - because our ability to influence others depends on our willingness to lead."
New Secretary of State John Kerry (Photo: AFP)
Obama vowed to remain involved in global issues. "In defense of freedom, we will remain the anchor of strong alliances from the Americas to Africa; from Europe to Asia. In the Middle East, we will stand with citizens as they demand their universal rights, and support stable transitions to democracy.
"The process will be messy, and we cannot presume to dictate the course of change in countries like Egypt; but we can - and will - insist on respect for the fundamental rights of all people."
He went on to address his upcoming visit to the Middle East. "We will keep the pressure on a Syrian regime that has murdered its own people, and support opposition leaders that respect the rights of every Syrian. And we will stand steadfast with Israel in pursuit of security and a lasting peace. These are the messages I will deliver when I travel to the Middle East next month."
As far as Americans are concerned, one of the most important issues is the war in Afghanistan, which Obama opened his speech with.
"Today, the organization that attacked us on 9/11 is a shadow of its former self. Different al-Qaeda affiliates and extremist groups have emerged - from the Arabian Peninsula to Africa. The threat these groups pose is evolving. But to meet this threat, we don't need to send tens of thousands of our sons and daughters abroad, or occupy other nations."
He also said he would bring home within a year about half of the 66,000 US troops now in Afghanistan, shrinking the force to the size he found it when he entered the White House vowing to reinvigorate a stalemated war.
More will leave the battlefield in 2014, he said, but he did not spell out what US military presence would remain after 2014, when the US-led combat mission is scheduled to end. The stated goal is to prepare Afghanistan's army and police to handle the Taliban insurgency largely on their own by then.
Economic fairness for middle class
Stressing the economic issue, Obama challenged the divided Congress to raise the minimum wage and make government work for "the many," focusing on economic fairness for the middle class.
Obama vowed to turn much of his attention toward economic troubles like the 7.9% unemployment rate, an issue that dogged his first four years as president.
While he offered few concessions to Republican demands for spending cuts, Obama backed higher taxes for the wealthy and a $50 billion spending plan to create jobs by rebuilding degraded roads and bridges.
In the most emotional moment of the hour-long speech, Obama urged Congress to ban assault weapons and take other gun control measures. Victims of recent shootings like the school massacre in Newtown, Connecticut, looked on, some choking back tears.
But the central emphasis of his speech was to "build new ladders of opportunity" for the middle class.
"It is our unfinished task to make sure that this government works on behalf of the many, and not just the few," Obama told hundreds of lawmakers, Cabinet officials and dignitaries gathered before him in the well of the House of Representatives.
His address to a joint session of Congress came in the midst of yet another bitter battle with Republicans over taxes and spending, and this tussle cast a heavy shadow over his appearance.
Creating an emotional ending to his speech, Obama called on Congress to vote on measures to expand background checks, prevent gun trafficking, ban assault weapons and limit the size of magazines, saying victims deserved to have their elected officials vote on the proposals.
"They deserve a vote," Obama said, calling out the names of communities scarred by massacres, Newtown, Aurora, Oak Creek, Tucson, Blacksburg. "They deserve a vote."
Obama and Vice President Joe Biden have been trying to build public support for gun control after 20 children were shot in their school in Newtown, a day Obama has described as the worst of his presidency.
But they face an uphill battle against a powerful pro-gun lobby and a strong US tradition of hunting and gun ownership. The right to bear arms is guaranteed to Americans in the US Constitution.
Obama urged lawmakers to approve over the next few months an overhaul of immigration laws to permit a pathway to citizenship for some 11 million illegal immigrants. Republicans who saw Hispanics overwhelmingly vote for Obama over Republican challenger Mitt Romney last November are more open to new immigration rules but want stronger border security first.
In a nod to Republican worries over what they see as out-of-control government spending on entitlement programs for the elderly and poor, Obama said he would back efforts to reduce healthcare spending by the same amount over a decade as proposed by a bipartisan commission whose recommendations he had rejected.
Saying the 12 hottest years on record have taken place in the last 15, Obama vowed to take action to confront climate change through presidential executive orders unless Congress enacts legislation.
The Associated Press and Reuters contributed to this report