Hundreds of thousands of Palestinians either fled or were expelled during the war surrounding Israel's creation in 1948. Today, the surviving refugees, with their descendants, number several million people.
The Palestinians claim they have the right to return to their family's lost properties. Israel rejects the principle, saying it would mean the end of the country as a Jewish democracy. Israeli leaders say the refugees should be entitled to compensation and resettled in a future Palestine to be established next to Israel, or absorbed where they now live.
In his speech last Thursday, Obama did not explicitly mention the refugees. But by saying a final peace deal must recognize "Israel as a Jewish state and the homeland for the Jewish people," he appeared to back the Israeli position.
The issue is so central to Palestinian policy and society that no Palestinian leader can be seen as abandoning the rights of the refugees, particularly at a time when peace efforts are at a standstill and so many other difficult issues, such as borders and the final status of Jerusalem, remain unresolved.
Nabil Shaath, a senior Palestinian official, said recognition of Israel as a Jewish state would sell out not only the refugees, but potentially open the door to Israel expelling its roughly 1.5 million Arab citizens as well. This idea has never been seriously raised in Israel.
He said the Palestinian recognition of Israel's right to exist, without any reference to national character, should be sufficient.
"We recognize Israel as a state," he said. "It's a recognition of a state to a state."
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