America is heading in the right direction and now needs to reshape some priorities to ensure future strength and stability, President Barack Obama told the nation Tuesday in his second State of the Union address.

"We know what it takes to compete for the jobs and industries of our time," Obama said to applause. "We need to out-innovate, out-educate and out-build the rest of the world. We have to make America the best place on Earth to do business. We need to take responsibility for our deficit and reform our government. That's how our people will prosper. That's how we'll win the future."

Obama heads to Wisconsin on Wednesday to highlight growing opportunities in clean energy, an example of the kind of innovation investment he championed Tuesday night.

The annual speech to both chambers of Congress and all three branches of government, a night of political pageantry and symbolism, presented a new political reality. Obama used his State of the Union address to make an impassioned plea for parties to work together in the divided US Congress.

He called for action to cut the deficit and meet the challenges from new competitors, such as India and China. According to him the US is now "poised for progress" after "the worst recession most of us have ever known".

Obama said technical advances, the rise of nations like India and China and the export of jobs overseas, meant that for many Americans, "the rules have changed" and it was now essential to encourage "American innovation" to secure jobs.

This is our generation's Sputnik moment," he said, referring to the Soviets' achievement in putting the first satellite into orbit ahead of the US in 1957.

"Two years ago, I said that we needed to reach a level of research and development we haven't seen since the height of the Space Race," he said, pledging to invest in education and create a budget which would meet that goal.

"We'll invest in biomedical research, information technology, and especially clean energy technology - an investment that will strengthen our security, protect our planet, and create countless new jobs for our people."

Obama said the issue of illegal immigration had to be tackled once and for all, but that the country must learn to value the children of undocumented workers, who could play a vital role in the US economy but face the constant threat of deportations.

The president said the government would invest in large-scale improvements in infrastructure, including high-speed rail links and ensuring 98% of Americans had high-speed wireless internet connections within the next five years.

Foreign policy was only briefly touched on in the speech, but Obama said US combat troops had ended their mission in Iraq "with their heads held high", while al-Qaeda's leadership in Pakistan was "under more pressure than at any point since 2001".

In Afghanistan, he said, "there will be tough fighting ahead", but that the US was committed to building an enduring partnership with the Afghan government.

"Our purpose is clear - by preventing the Taliban from re-establishing a stranglehold over the Afghan people, we will deny al-Qaeda the safe haven that served as a launching pad for 9/11," he said.

Obama also hailed improved relationships with Russia and India and urged Congress to approve a recently-negotiated free trade agreement with South Korea.

In a change from tradition, many rival Democrats and Republicans were sitting together in the chamber to hear the president's speech, instead of separately.

The gesture was intended to show unity, amid the heated debate since a mass shooting in Arizona three weeks ago in which Congresswoman Gabrielle Giffords was seriously injured.

The State of the Union speech is nationally televised and is historically one of the most watched political events in the US.

The speech comes less than two weeks after a mass shooting in Tucson, Arizona that injured Giffords and 12 other people and left six people dead.

A seat in Congress was remained empty in honour of Giffords and family members of some of the victims were sitting with First Lady Michelle Obama.

Obama began his speech by paying tribute to Giffords, saying the shooting had reminded the US public that they "share common hopes and a common creed".

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