Mubarak, in his first presidential summit in the United States in five years, argued that rows over issues like settlements and proposals for piecemeal Arab concessions to Israel were bogging the process down.
"We need to move to the final status solution and level," Mubarak told reporters as he sat with Obama in the Oval Office.
"I have contacted the Israelis and they said 'perhaps we can talk about a temporary solution,' but I told them 'No', I told them 'forget about the temporary solution, forget about temporary borders.'"
Final status talks would tackle the most intractable issues in the Middle East, including the status of Jerusalem in perpetuity, the borders of a final Palestinian state and the right of return for Palestinian refugees.
Israeli Foreign Minister Avigdor Lieberman told US lawmakers last week that pushing for a fast-track deal over the next year would not work and proposed concentrating on security and Palestinian economic conditions.
Obama, throwing himself deeper into the mire of Middle East peacemaking which has confounded his predecessors, was optimistic, despite little progress so far for his peace effort.
"If all sides are willing to move off of the rut that we're in currently, then I think there is an extraordinary opportunity to make real progress, but we are not there yet."
The US president also praised the Israeli government for deciding not to issue new tenders for settlement construction in the occupied West Bank until early 2010.
"There has been movement in the right direction," Obama said, saying the Israeli government was taking its talks with Washington seriously amid a rare public showdown between the two allies.
"My hope is that we are going to see not just movement from the Israelis, but also from the Palestinians around issues of incitement and security, from Arab states that show their willingness to engage Israel."
But Palestinians and other critics dismissed the Israeli move as insignificant, pointing out that construction continues on the ground in a number of settlements in Palestinian territory.
Obama has been pushing Arab states to make small concessions to Israel to unlock stalled peace moves and has called on the Jewish state to halt settlement expansion.
But Mubarak told Obama he would not offer concessions until Israel took its own "concrete steps," his spokesman Soliman Awaad said, adding that Arab states believed Netanyahu deliberately slowed peace efforts during his first spell as Israeli leader.
"It's like an egg and chicken situation," Awaad said. "He told him it won't fly. He reminded him that this was a deja vu situation."
Awaad also told reporters the US president hoped to unveil a comprehensive Middle East peace plan at around the time of the UN General Assembly (UNGA) next month.
"Today, Mr. Obama said that hopefully after (Obama's Middle East peace envoy George) Mitchell and Netanyahu meet next week, the peace blueprint should be there in the course of next month, in September," Awaad said.
White House spokesman Robert Gibbs denied any knowledge of such a plan, though he said the UNGA would be an important chance to forge progress. The US State Department confirmed plans for Mitchell to meet Netanyahu before the end of the month.
During his first White House talks with Obama, Mubarak poured praise on the US president over his historic address to the Muslim world in Cairo in June.
"He came to give his address, it was a very strong address and it removed all doubts about the United States and the Muslim world," he said.
The White House said Obama raised the issue of human rights and political reform in Egypt, after the president had been accused of soft pedaling the issue to get Cairo on side with his peace drive.
"I would not agree with the premise that we have somehow swept under the rug, in either this relationship or in relationships with other countries, the notion of human rights or greater democracy in the world." Gibbs said.
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