His remarks came after the Palestinians reiterated their refusal to hold even indirect talks without a complete Jewish settlement freeze and following a flare-up of violence in the Hamas-ruled Gaza Strip.
"We continue to see that the Palestinians are hardening their positions. They do not show any sign of moderation," Netanyahu said at the start of a weekly cabinet meeting.
Palestinian president Mahmud Abbas has ruled out holding any talks with Israel unless it freezes settlement construction in the West Bank including mostly Arab east Jerusalem, seized and annexed by Israel in 1967.
On Sunday Arab leaders backed his position in a concluding statement of a two-day summit in Libya attended by 14 of the 22 members of the Arab League.
"The resumption of Palestinian-Israeli negotiations demands that Israel implements its legal commitments by stopping all settlements in the occupied Palestinian territories, including east Jerusalem," they said.
The statement insisted "on the need to have a timeframe for these negotiations and that they resume from where they left off and on the basis of what has been agreed upon in the peace process."
The statement also urged US President Barack Obama to keep up "his initial and key position" to work to halt Israeli settlement growth.
The impasse comes amid a surge of violence in Gaza, where two Israeli soldiers and, according to medics, one Palestinian, were killed on Friday in the deadliest clashes since Israel's 22-day war on Hamas ended in January 2009.
Another Palestinian was killed when tanks moved into the same area the next day, and witnesses said Israeli forces were conducting a limited operation there on Sunday, though no clashes or casualties were reported.
A minister from Netanyahu's rightwing Likud party, meanwhile, warned on Sunday that Israel would eventually "liquidate" Gaza's Hamas rulers, who seized control of the territory after routing Abbas's forces in June 2007.
"I am not setting a timetable, but we will not tolerate this regime continuing to strengthen itself militarily," Finance Minister Yuval Steinitz told Israeli public radio.
Hamas spokesman Fawzi Barhum said Steinitz's remarks "reflect the criminal intentions of the Zionist occupation government and confirm its continuing acts of state terrorism."
Earlier this month, Abbas reluctantly agreed to US-mediated indirect talks with Israel but the planned negotiations collapsed two days later when Israel announced plans to build 1,600 new settler homes in east Jerusalem during a visit by US Vice President Joe Biden.
The project set off a major diplomatic crisis with the United States.
A minister from the centre-left Labour party said on Sunday it would meet next week to discuss quitting the rightwing-led coalition, a move that would leave Netanyahu with a razor-thin majority of 61 seats in the 120-member parliament.
Netanyahu has refused to halt construction in east Jerusalem, which Israel views as part of its "eternal, undivided" capital. No other government recognises its claim to the eastern sector of the city.
The premier imposed a 10-month halt on new construction in the West Bank in November, but the move was rejected by the Palestinians because it did not include east Jerusalem, public buildings and projects already under way.
A half million Israelis live in more than 120 settlements in the occupied Palestinian territories, including some 200,000 Jews living in east Jerusalem alongside about 270,000 Arabs.
Israel said it would restrict access to its territory from the West Bank for the week-long Jewish Passover holiday, which begins at sunset on Monday.
But in a bizarre incident, a group of Palestinian, Israeli and foreign activists who marched to a checkpoint outside Jerusalem to protest the closures walked through waving Palestinian flags and towing a donkey and a horse.
The soldiers manning the checkpoint were apparently caught off guard, as were Israeli police, who scrambled to escort them back to the West Bank.