President Barack Obama told Americans nervous about terror and the changing economy that they should not fear the future, in a farewell State of the Union address that drew sharp contrast with Republicans.

In an election-year marquee event, Obama hailed a period of "extraordinary change" laden with both opportunity and the risk of wider inequality.

A confident Obama sought to cast himself as an optimistic foil to foes who warn the country is going in the wrong direction after his seven years in office.

While vowing to work to find a cure for cancer, accelerate the shift away from "dirty energy" and end the last remnants of the Cold War by engaging with Cuba, Obama said "America has been through big changes before."

"Each time, there have been those who told us to fear the future; who claimed we could slam the brakes on change, promising to restore past glory if we just got some group or idea that was threatening America under control. And each time, we overcame those fears."

With less than three weeks until the Iowa caucuses -- the first votes cast in the process to replace him, Obama berated talking points used by Republican candidates, saying "anyone claiming that America's economy is in decline is peddling fiction."

He also lashed out at rhetoric over the rise of the Islamic State group, which he admitted poses an "enormous danger."

But he emphasized: "They do not threaten our national existence."

"Over-the-top claims that this is World War III just play into their hands," he said.

"Our answer needs to be more than tough talk or calls to carpet bomb civilians. That may work as a TV sound bite, but it doesn't pass muster on the world stage."

LAST CHANCE

Tuesday's primetime address was perhaps Obama's last big opportunity to sway a national audience and frame the 2016 election race.

Around 30 million viewers are expected to watch live, a nationwide audience that may only be matched in political terms during the Democratic nominating convention later this year.

The primetime address was perhaps US President Barack Obama's last big opportunity to sway a national audience and frame the 2016 election race. Photo: AFP

But it risked being overshadowed by news that 10 US Navy personnel have been taken to an Iranian naval base in the Gulf.

Senior US officials said they had received assurances the crews would sail onwards come first light, but Republicans have held the crisis up as evidence that Obama was naive to engage with Tehran.

In an unorthodox speech that tried to lift the country's gaze beyond the next year, and beyond his presidency, Obama also tackled the country's broken politics.

"It's one of the few regrets of my presidency  --  that the rancor and suspicion between the parties has gotten worse instead of better," he said in a moment of personal candor.

"There's no doubt a president with the gifts of Lincoln or Roosevelt might have better bridged the divide, and I guarantee I'll keep trying to be better so long as I hold this office."

South Carolina Governor Nikki Haley is expected to say in her rebuttal of Obama's address that "the president's record has often fallen far short of his soaring words."

"As he enters his final year in office, many Americans are still feeling the squeeze of an economy too weak to raise income levels."

She will also cite "chaotic unrest in many of our cities" and "the most dangerous terrorist threat our nation has seen since September 11th."