Republican contender Donald Trump said the speech was "one of the most boring"
Barack Obama used his final State Of The Union address to take a swipe at Donald Trump by urging the US not to give in to fear and division.
Republican presidential front-runner Mr Trump recently called for a ban on Muslims entering the US.
But in his primetime speech to a joint session of Congress, with around 30 million television viewers tuning in, the President issued a plea for tolerance.
"This isn’t a matter of political correctness," he said, in one of his last chances to hold the nation's attention before a new president is elected in November".
"When politicians insult Muslims, whether abroad or our fellow citizens," he added, "when a mosque is vandalised, or a kid bullied, that doesn’t make us safer. That's not telling it like it is. It's just wrong".
Mr Trump tweeted that the speech was "boring".
The State Of The Union speech was one of the most boring, rambling and non-substantive I have heard in a long time. New leadership fast!— Donald J. Trump (@realDonaldTrump) January 13, 2016
With Republicans criticising his fight against the Islamic State group, Mr Obama condemned the jihadists as "killers and fanatics who have to be rooted out, hunted down and destroyed".
Up to seven in 10 Americans are nervous about terrorism and believe the US is heading in the wrong direction, according to recent polls.
Facing an audience filled with Republican lawmakers who have thwarted much of his agenda, Mr Obama also issued a clarion call to "fix our politics".
"It's one of the few regrets of my presidency - that the rancour and suspicion between the parties has gotten worse instead of better," said the president, who swept to power in 2008 on a unifying promise of hope and change.
The official Republican response to his address was delivered by South Carolina Governor Nikki Haley.
Ms Haley, the daughter of Indian immigrants, called on the nation to resist "the siren call of the angriest voices" in anxious times.
Her remarks in defence of immigrants were also interpreted as a veiled jab at hardline conservatives such as Mr Trump.
In his speech, Mr Obama unveiled no specific policy proposals, but instead sought to generate support for items high on his to-do list, including closure of Guantanamo Bay and tighter gun laws.
As the two-term Democratic president looks to his legacy after seven years in the White House, he focused on accomplishments such as his signature healthcare law.
Mr Obama also touted more recent achievements including a nuclear deal with Iran, a diplomatic thaw with Cuba and a huge budget deal with Congress.
However, his remarks on Tehran came amid the Iranian seizure of two US Navy vessels and their 10 crew in the Gulf.
The White House has also put together a 'supercut' of his State of the Union speeches since he took office.