Barack Obama says Iraq's government must make a serious effort to address sectarian differences or US military help cannot succeed in curbing a rising insurgency.
He told reporters at the White House: "We can't do it for them."
The president said the US will not send combat troops back into Iraq, but added that he had asked his national security team to explore a range of other options which he will review in the coming days.
Mr Obama said the risk posed by terrorists in Iraq could eventually pose a threat to US interests, adding that the White House would pursue diplomatic solutions in Iraq and the surrounding region.
He was reacting after an al Qaida-inspired group, the Islamic State of Iraq and Levant, captured a series of northern cities and threatened to press forward to Baghdad.
A sharp burst of violence this week led to the evacuation of Americans from a major air base in northern Iraq where the US had been training security forces.
"We do have a stake in making sure that these jihadists are not getting a permanent foothold," Mr Obama said yesterday in the Oval Office.
For more than a year, the Iraqi government has been pleading with the US for additional help to combat the insurgency, which has been fuelled by the civil war in neighbouring Syria. Northern Iraq has become a way station for insurgents who routinely travel between the two countries and are spreading the Syrian war's violence.
Iraqi leaders made a fresh request earlier this week, asking for a mix of drones and manned aircraft that could be used for surveillance and active missions.
The US is already flying unmanned aircraft over Iraq for intelligence purposes, an official said.
Nearly all American troops left Iraq in December 2011 after Washington and Baghdad failed to negotiate a security agreement that would have kept a limited number of US forces in the country for a few more years.
Mr Obama said: "We're not going to allow ourselves to be dragged back into a situation in which, while we're there we're keeping a lid on things, and after enormous sacrifices by us, after we're not there, people start acting in ways that are not conducive to the long-term stability and prosperity of the country."
Administration officials said he is considering air strikes using drones or manned aircraft. Other short-term options include an increase in surveillance and intelligence gathering, including satellite coverage and other monitoring efforts.
The US also is likely to increase various forms of aid to Iraq, including funding, training and providing lethal and non-lethal equipment.
Mr Obama said it could take several days before the administration finalises its response to the situation on the ground in Iraq.
Islamic State of Iraq and the Levant earlier this week overran Iraq's second-largest city of Mosul and Saddam Hussein's home town of Tikrit, as well as military and police bases - often meeting little resistance from state security forces.
Today police said the militants had entered two towns in Diyala province - Jalula, 80 miles north east of Baghdad, and Sadiyah, 60 miles north of the Iraqi capital. Iraqi soldiers abandoned their posts without any resistance, they said.
The fast-moving rebellion, which also draws support from former Saddam-era figures and other disaffected Sunnis, has emerged as the biggest threat to Iraq's stability since the US withdrawal. It has pushed the nation closer to a precipice that could partition it into Sunni, Shiite and Kurdish zones.