Haley, 43, had called for the removal of the battle flag from the State capitol, days after nine people were killed inside a historic black church by a white shooter, who was seen holding the flag, a symbol of white supremacy.
"For too long, we were blind to the pain that the Confederate flag stirred in too many of our citizens," Obama said as he eulogised the slain at the Charleston church.
America's first black president said the flag -- long a symbol of Southern US pride -- must be removed from places of honour.
"For many -- black and white -- that flag was a reminder of systemic oppression and racial subjugation. We see that now," he said.
"It would simply be an acknowledgement that the cause for which they fought -- the cause of slavery -- was wrong -- the imposition of Jim Crow after the Civil War, the resistance to civil rights for all people was wrong," he said.
"It would be one step in an honest accounting of America's history; a modest but meaningful balm for so many unhealed wounds. It would be an expression of the amazing changes that have transformed this state and this country for the better," he said amid applause.
Obama used the occasion to call for gun control and efforts to eliminate poverty and job discrimination.
"For too long, we've been blind to the unique mayhem that gun violence inflicts upon this nation. Sporadically, our eyes are open: When eight of our brothers and sisters are cut down in a church basement, 12 in a movie theatre, 26 in an elementary school," he said.
"But I hope we also see the 30 precious lives cut short by gun violence in this country every single day; the countless more whose lives are forever changed - the survivors crippled, the children traumatised and fearful every day as they walk to school, the husband who will never feel his wife's warm touch, the entire communities whose grief overflows every time they have to watch what happened to them happen to some other place," Obama said.
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