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His remarks received a standing ovation from both Democratic and Republican representatives.
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.
SOURCE: Yitzhak Benhorin, AP