The US president also promises to deliver a “great” peace deal, but says both sides must compromise.
US President Donald Trump has asked Israeli Prime Minister Benjamin Netanyahu to “hold off” on settlements.
In a joint news conference, Mr Trump also promised to deliver a “great” peace deal, but said Israel and the Palestinians must both compromise.
Neither leader committed explicitly to back a future independent Palestine, a longstanding bedrock of US policy.
Israel has approved thousands of new homes in West Bank and East Jerusalem settlements since Mr Trump took office.
The Israeli government is hoping for better relations with the White House after eight years of friction with the former Obama administration.
At Wednesday’s press conference, Mr Trump was asked about his commitment to the so-called two-state solution.
A “two-state solution” to the decades-old conflict between Israelis and Palestinians is the declared goal of their leaders and the international community.
It is the shorthand for a final settlement that would see the creation of an independent state of Palestine within pre-1967 ceasefire lines in the West Bank, Gaza Strip and East Jerusalem, living peacefully alongside Israel.
The UN, the Arab League, the European Union, Russia and, until now, the US routinely restate their commitment to the concept.
“So I’m looking at two states and one state,” said Mr Trump. “And I like the one that both parties like. I’m very happy with the one that both parties like.
“I can live with either one. I thought for a while that two states looked like it may be the easier of the two.
“To be honest, if Bibi [Mr Netanyahu] and the Palestinians, if Israel and the Palestinians are happy – I’m happy with the one they like the best. ”
He said it would ultimately be up to the parties themselves to reach a peace agreement.
Mr Trump was also asked about his election promise to move the US embassy from Tel Aviv to Jerusalem, which could have serious implications for any peace negotiations.
“As far as the embassy moving to Jerusalem, I’d love to see that happen,” Mr Trump said.
“And we’re looking at it very, very strongly. We’re looking at it with a great care, a great care, believe me. And we’ll see what happens. ”
When he was asked about a two-state solution, Mr Netanyahu said he wanted to focus on “substance” and not “labels”.
“There are two prerequisites for peace,” said the Israeli prime minister. “First the Palestinians must recognise the Jewish state.
“Second, in any peace agreement, Israel must retain the overriding security control over the entire area west of the Jordan River. ”
The Israeli prime minister said he believed reversing the “rising tide of radical Islam” was possible with Mr Trump in the White House.
Mr Netanyahu also name-checked Mr Trump’s Jewish son-in-law Jared Kushner – whose father, a New Jersey real estate tycoon, has been a top political donor to the Israeli prime minister.
Mr Trump has appointed Mr Kushner, who has no experience in diplomacy, to lead the effort to negotiate a Middle East peace agreement.