In a stark contrast to his smooth-running public appearances with Israeli leaders, the US president found himself on the back foot when forced to address the issue after a 90-minute meeting with Mr Abbas in the West Bank city of Ramallah.
Mr Obama said he had told Benjamin Netanyahu, Israel's prime minister, that settlement expansion in east Jerusalem and the West Bank on land the Palestinians want for a future state was not "constructive" or "appropriate".
But he did not repeat his previous call, issued in 2009, that building must cease, pleading instead for resumed talks on the "core issues" of establishing a sovereign Palestinian state and providing security for Israel.
"That's not to say settlements aren't important. That's to say if we solve those two problems, the settlement issue will be resolved," Mr Obama told a press conference in a rambling answer in which his normal fluency seemed to desert him.
Referring to Palestinian demands for a building freeze before re-starting talks, he admitted that settlements were "frustrating".