"Muslim Americans are as patriotic, as integrated, as American as any other members of the American family," Obama said at a White House reception to celebrate the Muslim Eidul Fitr holiday.
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"Whether your family has been here for generations or you're a new arrival, you're an essential part of the fabric of our country," he said.
The Obama administration has faced criticism for its plan to admit as many as 10,000 Syrian refugees to the United States this year, with some Republicans warning that violent militants could enter the country posing as refugees.
Republican presidential candidate Donald Trump had proposed a temporary ban on Muslims entering the country after a Muslim American and his wife killed 14 people in San Bernardino, California, last year.
While not naming Trump specifically, Obama said that discriminatory policies against Muslims are an affront the "values that already make our nation great."
Trump, who will be giving his official acceptance speech at the Republican National Convention on Thursday night, has used "make America great again" as his campaign slogan.
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"Singling out Muslim Americans, moreover, feeds the lie of terrorists like ISIL, that the West is somehow at war with a religion that includes over a billion adherents," Obama said, using an acronym for the Islamic State militant group. "That's not smart national security."
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