Mr Bush telephoned beleaguered Palestinian president Mahmoud Abbas to reaffirm his support and called leaders of Saudi Arabia, Jordan, and Egypt to seek their backing for the initiative, said spokesman Gordon Johndroe.
VIDEO: Talks proposal
"Now comes a moment of choice. The alternatives before the Palestinian people are stark," Mr Bush said in a speech at the White House aimed at bolstering Mr Abbas and undercutting Hamas, which Washington brands a terrorist group.
Mr Bush warned that support for Hamas, which seized Gaza from Abbas backers on June 15, would be a victory for the militant group's "foreign sponsors" in Syria and Iran and "would crush the possibility of a Palestinian state."
The US president said Israel and the Palestinians and their Arab neighbours can do more to help revive Middle East peace prospects and called for an international conference within months.
"The world can do more to build the conditions for peace," he said, adding that US Secretary of State Condoleezza Rice will chair the gathering and that attendance will be limited to states that back the creation of a Palestinian state, reject violence, and recognise Israel.
Hamas condemns the plan
The plan won instant backing from Israel and Mr Abbas, but swift condemnation from Hamas.
"We condemn this American conference which aims to serve the interests of the Zionist enemy," spokesman Ismail Radwan told newswire agency AFP.
"The conference will lead to increased pressure on Mahmud Abbas and separate the Gaza Strip more deeply from the West Bank while sowing division among Palestinians," Mr Radwan added.
US support Jewish state
Mr Bush also urged Arab nations to end "the fiction that Israel does not exist," curb anti-Israel rhetoric in their media and send cabinet-level officials to the Jewish state.
And Mr Bush pushed Israeli Prime Minister Ehud Olmert to continue to release Palestinian tax revenue to Palestinian Prime Minister Salam Fayyad; halt Israeli settlement expansion and dismantle unauthorised outposts.
Israelis "should be confident that the United States will never abandon its commitment to the security of Israel as a Jewish state and homeland for Jewish people," said the embattled US president.
Mr Bush also hailed talks earlier in the day between Mr Olmert and Abbas, as a senior Israeli official said the prime minister had pledged to free 250 Palestinian prisoners in a goodwill gesture to the Palestinian leader.
But while welcoming the release, the Palestinians said the freeing of 250 prisoners out of the more than 11,000 currently held in Israeli jails was not enough.
Mr Bush also announced a direct US contribution of $US80 million ($A92.05 million) to help Abbas reform his security services.
Two US officials said the money was being shifted from Gaza to Fayyad's government.
A 'Palestinian state'
More US aid will come when former British Prime Minister Tony Blair, now the envoy for the Middle East "quartet" of the United States, United Nations, European Union, and Russia, reports success in building a plan for bolstering Palestinian security and political institutions.
"With the proper foundation, we can soon begin serious negotiations toward the creation of a Palestinian state," said Mr Bush.
But "we're not going to announce a dollar amount for a plan that has yet to be elaborated or announced," a senior US official said on condition of anonymity.
The members of the diplomatic quartet are to meet in the Portuguese capital Lisbon on Thursday to take stock after Abbas appointed a new government following the abrupt takeover of Gaza by Hamas.
It is to be the first meeting between the quartet's chief diplomats, including Rice, and Blair, who was named to the envoy post shortly after stepping down as British leader on June 27.