In his speech in the House chamber, Obama was telling lawmakers that the Democratic plans for health care overhaul do not cover illegal immigrants.
"The reforms I'm proposing would not apply to those who are here illegally," Obama said.
"You lie!" Rep. Joe Wilson of South Carolina shouted from his seat, jabbing a finger in the air.
In a statement, Wilson said later that he regretted the incident.
"This evening I let my emotions get the best of me," Wilson said. "While I disagree with the president's statement, my comments were inappropriate and regrettable. I extend sincere apologies to the president for this lack of civility."
Wilson's outburst caused Obama to pause briefly and say, "That's not true."
Behind him House Speaker Nancy Pelosi could be seen glaring in Wilson's direction, but there was no move by Democratic leaders to censure Wilson. First lady Michelle Obama, in the visitors' gallery, shook her head from side to side disapprovingly.
Neither the House nor the Senate health care overhaul bills would provide coverage for illegal immigrants.
Wilson's wasn't the only interruption during Obama's speech to a joint session of Congress.
Earlier, Republicans laughed when Obama acknowledged that there still were significant details to be worked out before a health overhaul can be passed.
Following the speech, it was Obama's Republican rival from last year's presidential race for the White House who defended the president.
It was "totally disrespectful," Arizona Sen. John McCain said on CNN of Wilson, a conservative who has opposed Obama's economic remedies. "There is no place for it in that setting, or any other, and he should apologize for it immediately."