"Too often in the Middle East, politics has consisted of one leader in power and the opposition in jail," he said at the annual World Economic Forum of the Middle East, a summit of influential politicians and business leaders, held here in Sharm el-Sheik.
The comment was taken as criticism for the host of the summit, Egypt, which is an important US ally. The United States has been quietly lobbying the Egyptian government for the release of Ayman Nour, who has been in prison since he came in a distant second to Hosni Mubarak in presidential elections in 2005.
"I call on all nations in this region to release their prisoners of conscience, open up their political debate, and trust their people to chart their future," said Mr. Bush.
While his message of freedom and democracy in the Arab world has been a constant during his administration, the words he delivered here chiding Arab leaders did not sit well with many, especially as they came on the heels of his laudatory remarks for Israel to mark its 60 anniversary.
In that speech last Thursday, Bush praised Israel as a "homeland for the chosen people" and mentioned the Palestinians only once.
But on Sunday, he said, his voice rising at times with emotion: "We must stand with the Palestinian people, who have suffered for decades and earned the right to a homeland of their own. I strongly support a two-state solution – a democratic Palestine based on law and justice that will live in peace and security alongside a democratic Israel."
There is strong skepticism in the region about his ability to secure an Israeli-Palestinian peace deal before his second term ends in nine months. That feeling was often palpable among the audience at the summit.
"President Bush promised all of us, the Palestinians and all the Arabs, that he would establish a Palestinian state," says Mohamed Abu el-Enein, a member of the Egyptian People's Assembly from the ruling National Democratic Party.
"We are still waiting for him to fulfill his promise," he says. "When is he going to actually do it? Where is his promise?"
Palestinian Authority President Mahmoud Abbas did not hide his disappointment with Bush's remarks in Jerusalem. "We do not want the Americans to negotiate on our behalf," Mr. Abbas said Sunday after talks with Mr. Mubarak. "All that we want from them is to stand by [our] legitimacy and have a minimum of neutrality."
Abbas and Bush had dinner together on Saturday. Secretary of State Condoleezza Rice said Sunday that serious Israeli-Palestinian peace negotiations were going on in private and she expected them to intensify in the coming months.
The president's stop in Egypt comes after he visited Saudi Arabia where his request for increased oil production was gently rebuffed by King Abdullah, who agreed to a token increase of 300,000 barrels a day, out of an estimated 9.45 million.
In his speech, Bush also attacked Iran and Syria for supporting Hezbollah and its role in the unfolding strife in Lebanon. He called the Shiite militant group "spoilers" to regional peace and prosperity and hostile to the emergence of "an independent and sovereign democracy" in Lebanon.
"It is now clearer than ever that Hezbollah militias are the enemy of a free Lebanon – and all nations, especially neighbors in the region, have an interest in helping the Lebanese people prevail," Bush said.
The trip was Bush's second to the Middle East this year. His national security adviser, Stephen Hadley, said Bush might return again before his term ends in January if "there is work for him to advance the peace process."
• Material from the Associated Press was used in this report.