While the rate of strikes has fallen sharply in Obama's second term, he has ordered 350 attacks compared with about 50 under George W Bush.
Under the directive, the US must show it has exhausted all options for capturing the terrorists before launching a strike, but Obama cautioned that special operations raids like the one against Osama bin Laden "cannot be the norm".
The Administration's tendency to kill rather than capture has led to criticism that it is failing to extract valuable intelligence from targets.
In a significant shift, the US military will now take the lead on drones rather than the CIA. The military would be the key authority in both the active war in Afghanistan and legally complex areas such as tribal Pakistan.
Obama once again called for Congress to allow him to fulfil his 2009 promise to close the controversial prison camp at Guantanamo Bay, which he said had "become a symbol around the world for an America that flouts the rule of law".
Of the 166 men still detained at the facility in Cuba, 86 are slated for release, including more than 50 from Yemen.
Obama said he would restart transferring cleared detainees to Yemen, a process halted in early 2010, and that he would appoint two senior officials "whose sole responsibility will be to achieve the transfer of detainees to third countries".
Pointing to the hunger strike at Guantanamo, where dozens of detainees are being force fed through tubes, Obama asked: "Is that who we are? Is that something our founders foresaw? Is that the America we want to leave to our children?"
His speech came a day after the US confirmed for the first time that it had killed four Americans in drone strikes in Yemen and Pakistan, but said only one - Anwar al-Awlaki, the US-born al-Qaeda cleric - had been deliberately targeted.