US will be 'clear eyed' with Iran: Obama

US President Barack Obama has thanked Israeli Prime Minister Benjamin Netanyahu for his "courage" in "good faith" negotiations with the Palestinians.

"I commended him for entering into good faith negotiations with the Palestinian Authority. I appreciate the prime minister's courage in being willing to step forward," he said.

Meanwhile Netanyahu warned on Monday that Iran must dismantle its "military nuclear program" as a condition for a diplomatic breakthrough that would head off the prospect of military action.

Netanyahu told Obama in the White House talks that such a step was Israel's "bottom line" as hopes rise of a deal to end the nuclear showdown between Washington, world powers and Tehran.

Obama, meanwhile, promised Netanyahu that the United States would be "clear eyed" in talks with Iran but that it had to "test" prospects for a breakthrough, though reserved the right to take military action against nuclear installations in Iran if diplomacy failed.

Netanyahu warned that Iran was committed to Israel's destruction and that its words and actions should be judged with that in mind.

"The bottom line is that Iran fully dismantles its military nuclear program," he said.

Netanyahu also argued that economic sanctions must be kept through any diplomatic process with Iran, which will resume next month in Geneva.

Obama credited the economic sanctions that have hammered Iran's economy with prompting its leaders to try a more serious diplomatic process on the nuclear program, following his telephone call on Friday with Iranian President Hassan Rouhani.

"We have to test diplomacy, we have to see if in fact they are serious about their willingness to abide by international norms and international law," Obama said.

"We enter into these negotiations very clear eyed. They will not be easy."

Obama also made clear that he reserved the right to take military action against Iran.

"We take no options off the table, including military options," he said.