He also asked Iran to return to international talks on its controversial nuclear programme and threatened consequences if it did not do so.
Addressing the UN General Assembly, Bush expressed sympathy for the political plight of the people of the Middle East, saying "You have been fed propaganda and conspiracy theories that blame others for your country's shortcomings."
"And everywhere you turn, you hear extremists who tell you that you can escape your misery and regain your dignity through violence and terror and martyrdom."
"My country desires peace. Extremists in your midst spread propaganda claiming that the West is engaged in a war against Islam. This propaganda is false and its purpose is to confuse you and justify acts of terror," he said.
"We respect Islam, but we will protect our people from those who pervert Islam to sow death and destruction," said Bush, making the point that the objective was to help societies become more tolerant and hopeful and one that honors people of all faiths and promotes the peace.
Stressing that from Beirut to Baghdad, people are making the choice for freedom and that the nations gathered in the United Nations must make a choice as well, Bush said the US will support reformers and moderates across the Middle East.
The President debunked the notion that democratic changes in the Middle East is destabilising the region.
"This argument rests on a false assumption -- that the Middle East was stable to begin with. The reality is that the stability we thought we saw in the Middle East was a mirage," Bush argued going on to say that for decades millions of men and women in the region had been trapped in oppression and hopelessness.
"And these conditions left a generation disillusioned and made this region a breeding ground for extremism."
Bush then talked about the successes, challenges and opportunities in the Middle East as a whole focussing on Iraq, Afghanistan, Lebanon, Syria, Iran, Israel and Palestine as well as the ongoing genocide in the Darfur region.
On Iran, Bush said the country "must abandon its nuclear weapons ambitions."
Directly addressing the Iranians, Bush said, "...the United States respects you. We respect your country. We admire your rich history, your vibrant culture and your many contributions to civilisation. You deserve an opportunity to determine your own future, an economy that rewards your intelligence and your talents, and a society that allows you to fulfill your tremendous potential.
"The greatest obstacle to this future is that your rulers have chosen to deny you liberty and to use your nation's resources to fund terrorism and fuel extremism and pursue nuclear weapons."
"Despite what the regime tells you, we have no objection to Iran's pursuit of a truly peaceful nuclear power program. We're working toward a diplomatic solution to this crisis. And as we do, we look to the day when you can live in freedom, and America and Iran can be good friends and close partners in the cause of peace," Bush said.
For Iraq, Bush assured the people there that America will not abandon them but at the same time called on Iraqi leaders to make some difficult and tough choices.
"You stood firm in the face of horrendous acts of terror and sectarian violence. And we will not abandon you and your struggle to build a free nation," Bush said.
"America and our coalition partners will continue to stand with the democratic government you elected. We will continue to help you secure the international assistance and investment you need to create jobs and opportunity, working with the United Nations and through the international compact with Iraq endorsed here in New York," he added.
"In return, your leaders must rise to the challenges your country is facing and make difficult choices to bring security and prosperity. Working together, we will help your democracy succeed so it can become a beacon of hope for millions in the Muslim world."
In a blunt message to Damascus, Bush reminded the people there that the country has become a "crossroad for terrorism" thanks to its rulers and a phenomenon that is destabilising the region.
"...Hamas and Hezbollah are working to destabilise the region, and your government is turning your country into a tool of Iran. This is increasing your country's isolation from the world. Your government must choose a better way forward by ending its support for terror and living at peace with your neighbours, and opening the way to a better life for you and your families" Bush said.