"America has rarely been stronger relative to the rest of the world. Those who argue otherwise - who suggest that America is in decline, or has seen its global leadership slip away - are either misreading history or engaged in partisan politics," he said.
Obama argued, however, that US strength did not rest solely on military might or a willingness to go to war.
"US military action cannot be the only - or even primary - component of our leadership in every instance," he said, adding that Americans should not conclude every problem had a military solution simply because of the prowess of their armed forces.
"Just because we have the best hammer does not mean that every problem is a nail," he said.
The speech, which was billed as defining Obama's foreign policy vision, advocated a middle way between the isolationism of a war-weary US public and the interventionism demanded by hawks.
"The question we face - the question you will face - is not whether America will lead, but how we will lead, not just to secure our peace and prosperity but also to extend peace and prosperity around the globe," said Obama.
While pledging that he believed in the exceptionalism of American values "with every fibre of my being", Obama urged a more pragmatic diplomacy that mixed strategic realpolitik in Egypt, boldness in Burma and economic sanctions against Russia. "We must do so because collective action in these circumstances is more likely to succeed, more likely to be sustained and less likely to lead to costly mistakes."
Obama's nuanced approach to foreign policy has won him mixed reviews from the US public, with a recent Washington Post-ABC poll finding only 47 per cent of Americans approved of his handling of foreign affairs, compared with 60 per cent when he took office in 2009.