In the second of a series of speeches aimed at reversing the steep decline in US support for the war, Mr Bush unapologetically defended his decision to remove Saddam Hussein by force as "the right decision."
But he acknowledged that the failure to find the unconventional weapons at the core of the public case for invading had hurt US credibility.
Much of his speech focused on defending his stay-the-course strategy and on reaching out to Americans who worry that his optimism about Iraq's future is unjustified amid grim predictions that the country is sliding into civil war.
"The situation on the ground remains tense. In the face of continued reports about killings and reprisals, I understand how some Americans have had their confidence shaken," he said.
"Others look at the violence they see each night on their television screens and they wonder how I can remain so optimistic about the prospects of success in Iraq. They wonder what I see that they don't," he said.
Tal Afar
Mr Bush cited progress in the northern Iraqi city of Tal Afar, where US-led forces have carried out repeated campaigns to break the hold of terrorist network Al-Qaeda and other insurgents in the city.
Once a stronghold for extremists, Tal Afar is now "a free city that gives reason for hope for a free Iraq," he said, citing the city of roughly 200,000 near the Syrian border as a success story for US counter-insurgency tactics.
In the past, US-led forces would clear a city like Tal Afar of extremists, but would move on, letting them regroup and terrorize local populations who learned to be wary of promises of a safer life, the president said.
Mr Bush said progress "is not easy to capture in a short clip on the evening news" and "will never be as dramatic" as roadside bombs or other signs of a conflict that has killed more than 2,300 US soldiers.
Mr Bush has drawn fire in the past for offering upbeat, even rosy, assessments of the situation in Iraq, including the May 1, 2003 victory speech he gave in front of a "Mission Accomplished" banner.
In several more recent speeches, in late 2005 and early 2006, he has defended the flawed case for war but acknowledged "mistakes" in the post-invasion period while denying that the country is in the grips of civil war.
Some observers have challenged that assessment including Democratic Senator Joseph Biden who called the situation "low-grade civil war" and urging Mr Bush to seek more international help.
Former Iraq premier Iyad Allawi told the BBC on Sunday that an average of 50-60 Iraqis were being killed each day, adding:"If this is not civil war, then God knows what civil war is."
Fund raiser
Anti-war artists, musicians and activists are marked the third anniversary of the US-led invasion of Iraq with a concert to benefit groups campaigning against the war.
Musician Michael Stipe, actress Susan Sarandon and activist Cindy Sheehan will headline the Bring 'Em Home Now! concert to call for the withdrawal of US troops from Iraq.
"The arts can speak about critical issues of our time," said Chris Wangro, an event producer who helped organise the concert at the Hammerstein Ballroom in New York.
All profits from ticket sales are going to anti-war groups including Gold Star Families for Peace, which counts Sheehan among its founding members, and Veterans Against the War.
Iraq marks anniversary
Meanwhile a fresh spate of killingsIraq marked the third anniversary of the US-led invasion of Iraq, amid a deadlock over the new government and warnings of civil war as Shiites gathered in the south for a major religious ceremony.
Dozens of people died in attacks around the country,p in a reminder of the endemic violence that has continued in Iraq since the fall of Saddam Hussein's regime.
US and Iraqi forces were also on high alert should Sunni extremists attempt to trigger renewed outbursts of communal strife by targeting Shiite pilgrims descending on the shrine city of Karbala for a major religious ceremony.
About 500,000 pilgrims had been streaming daily in and out of Karbala, where the commemoration of the death of Imam Hussein, grandson of the Prophet Mohammed and a defining Shiite figure, was reaching its peak.
As violence continued, political parties remained bogged down in talks three months after national elections, amid disputes over the choice of prime minister and the allocation of ministries.
After agreeing on the formation of a National Security Council composed of all major political parties, the factions have further postponed negotiations on a new government until next week.