Bush said terrorists have killed innocent people around the world, most recently last week in Madrid where bombings claimed the lives of more than 200 people.
He said there is "no neutral ground in the fight between civilization and terror."
"There can be no separate peace with the terrorist enemy," Bush said. "Any sign of weakness or retreat simply validates terrorist violence and invites more violence for all nations."
Bush's speech in the East Room of the White House concluded a weeklong effort to boost support for the war on terrorism at a time when cracks are forming in the U.S.-led alliance that toppled Saddam Hussein. Ambassadors and diplomats from 84 countries joined members of the military and others in the audience.
Since the start of hostilities last year 569 U.S. troops have been killed in Iraq, according to Defense Department figures. Iraq is a major issue in the presidential race, and polls show that Americans are sharply divided over Bush's policy.
Bush acknowledged that the U.S.-led war had caused bitter divisions among allies. France and Germany led the opposition to Bush's call for the use of military force and stayed on the sidelines.
"Those differences belong to the past," Bush said.
But French Foreign Minister Dominique de Villepin said the world is a more dangerous place because of the Iraq war, which unleashed postwar violence and an upswing in terrorism.
"This is a belief that I have never stopped expressing," he told Le Monde newspaper. "Terrorism didn't exist in Iraq before," de Villepin said. "Today, it is one of the world's principal sources of world terrorism."
Bush said the fall of Saddam had removed a source of violence, aggression and instability in the Middle East.
"There are still violent thugs and murderers in Iraq, and we're dealing with them," Bush said. "But no one can argue that the Iraqi people would be better off with the thugs and murderers back in the palaces.
"Who would prefer that Saddam's torture chambers still be open? Who would wish that more mass graves were still being filled? Who would begrudge the Iraqi people their long-awaited liberation?"
With Saddam out of power, Bush said, "We mark a turning point for the Middle East and a crucial advance for human liberty."
Bush said history will note that this is a time of great challenge. "Let it also be said of our times that we understood our great duties and met them in full."
The audience listened in silence to his remarks but applauded at the end.